Question

If a car salesman is paid a fixed commission when he sells a car, the owner is most likely to see

(a) ​Large margins on sales

(b)​Low margins on sales

(c) ​No sales

(d) ​None of the above

Answer 1

If a car salesman is paid a fixed commission when he sells a car, then the salesman will receive the same commission for the first car he sells, the second car he sells...or the last car he sells. Selling every extra car will require increased effort from the salesman but since the commission is fixed, the salesman will have very low incentive to put any extra effort and hence the owner will not be able to sell more cars and so it will have have low margin on sales. To have large margin, the owner should provide for a non-linear commission where the salesman will be paid a higher commission for every additional car sold.

Thus the correct answer is option (b)