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

question 87

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. Which of the following statements about Scheme II is false?

• A) It is likely to draw highly productive workers who see the opportunity to increase their wages.
• B) It could discourage less productive workers and induce them to leave the firm.
• C) It allows workers to increase their daily wage without penalizing those who are content with their daily wage.
• D) It is more risky for senior employees.

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Definitions:

Consumer Surplus

The difference between the total amount consumers are willing to pay for a good or service and the total amount they actually pay.

Producer Surplus

The difference between what producers are willing to accept for a good versus what they actually receive, evidencing economic benefit.

Costume Jewelry

Jewelry made from inexpensive materials and imitation gems, designed to provide an attractive appearance at a lower cost than jewelry made from precious metals and stones.

Consumer Surplus

The difference between what consumers are willing to pay for a good or service versus what they actually pay.