A Salesperson Works for a Car Dealership for 40 Hours

Multiple Choice

A salesperson works for a car dealership for 40 hours per week,but may choose not to work hard all of the time.The dealership's owner cannot observe the salesperson's effort,but can observe the number of cars sold.The salesperson's personal cost of working at the dealership is C(H) = 1,200 + H²,where H is the number of hours during which he works hard.The corresponding marginal cost of effort is MC = 2H.Without any effort,the salesperson will,on average,generate a profit of $1,200.With each hour of high effort,he has a 5 percent chance of selling a car.Each car sale generates a profit of $900.Which of the following is an incentive scheme that leads to the efficient effort level and allows the owner to keep all of the surplus?

A) $900 in base pay with a $1,177.50 bonus for each car he sells
B) $900 in base pay with a $900 bonus for each car he sells
C) $600 in base pay with a $1,000 bonus for each car he sells
D) $1,177.50 in base pay with a $900 bonus for each car he sells