Peter Was Recently Hired as a Salesman for a National

question 441

Multiple Choice

Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. His firm is paying him a wage that is higher than the equilibrium wage, but he receives much of his income in quarterly bonuses based on how much he sells.

• A)The consulting firm is trying to prevent adverse selection with its compensation strategy.
• B)Peter has an incentive to go golfing with his buddies rather than conducting sales meetings.
• C)The consulting firm is responding to the moral hazard problem with its compensation strategy.
• D)Peter should quit this job and take a job where he gets paid an equilibrium wage more frequently.

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Definitions:

Net Income

Net Income is the total earnings of a company after all expenses and taxes have been deducted from revenue.

Shareholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, often referred to as net assets or equity.

Cost of Capital

The necessary rate of gain a company must obtain from its investments to keep its market price constant and attract financial support.

Project Risk

The potential for losing time, quality, or resources in the pursuit of a project’s objectives.