Figure 17-6 Figure 17-6 Shows Two Different Compensation Schemes

question 56

Multiple Choice

Figure 17-6 Figure 17-6 shows two different compensation schemes for the Safelite Glass Corporation, an installer of auto glass windshields. Under Scheme I, the firm pays a consistent wage of $80 per day based on an 8-hour workday. Qmin represents the cut-off point under the hourly-wage system: if a worker installed fewer than Qmin windshields, the worker got fired. Scheme II represents a piece-rate scheme with an earnings floor: no worker would get less than $80 per day (for an 8-hour workday) and would have to produce at least Qmin. For any output level beyond Q* the worker earned an additional $20 for each unit produced.
-Refer to Figure 17-6. Under Scheme I,

• A) workers compete with each other to see who can produce beyond Qmin in the shortest possible time.
• B) workers have no incentive to produce beyond Qmin.
• C) workers signal their productivity to the firm by consistently producing above Qmin.
• D) the incentive to increase productivity depends on where Qmin is set; if it is at a very high level, then workers will rise to the challenge for fear of losing their jobs.

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Definitions:

Market Demand Curve

A graphical representation showing the relationship between the price of a good and the total quantity demanded across all consumers in the market.

Marginal Cost

The financial requirement to produce an additional unit of a product.

Inelastic

Describes a situation where the demand for a good or service is relatively unresponsive to changes in its price.

Market Power

Market power is the ability of a firm or a group of firms to raise and maintain prices at above-normal levels, influencing the terms and conditions of a particular market.