Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 14

Susan Jones is a salesperson at Radex Co. Her utility function can be represented by U = C 2 , where C is her compensation.
a. The company is considering paying her a sales commission rather than a straight salary. The sales manager, however, is concerned that he will have to pay her a compensating differential for imposing risk on her that is beyond her control (sales at Radex are heavily dependent on macroeconomic factors and central company policies). Is the sales manager's concern about paying Susan higher compensation justified Explain.
b. Is this example representative of the typical worker in most companies Explain.