Sales personnel, whether selling life insurance automobiles or pharmaceutical typically get paid on commission instead of a straigh hourly wage. How does paying commission help to solve the principal agent problem between the owners of a business and the sale force?
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The manager of All-City Realtors wants to hire some real estate agents to specialize in selling housing units acquired by the Resolution Trust Corporation (RTC) in its attempt to bail out the savings and loan industry. The commission paid by the RTC to the company to sell these homes is a flat rate of $2,000 per unit sold, rather than the customary commission that is based on the sale price of a home. The manager estimates the following marginal product schedule for real estate agents dealing in Government-owned housing:
Number of Agents | Marginal Product (# of Additional Units Sold per Year) | Marginal Revenue Product |
1 | 20 | Ā |
2 | 17 | Ā |
3 | 15 | Ā |
4 | 12 | Ā |
5 | 8 | Ā |
6 | 4 | Ā |
a. Construct the marginal revenue product schedule by filling in the blanks in the table.
b. If the manager of All-City Realtors must pay a wage rate of $32,000 per year to get agents who will specialize in selling RTC housing, how many agents should the manager hire? Why?
c. If the wage rate falls to $18,000 per year, how many agents should the manager hire?
d. Suppose RTC raises its commission to $3000 per unit sold. Now, what is the marginal revenue product for each real estate agent employed?
e. Now that the RTC is paying $3000 per unit sold, how many agents should the manager hire if the new wage rate is $30,000?