Question

Statement 1: “Incentive pay is always desirable...at least if you talk to economists. They argue that rewarding employers for increased productivity will always increase the firm’s profitability.”

Statement 2: “The most profitable amount of effort from a firm’s employee occurs when the gain in revenue from the extra output produced by that effort, is matched by the extra money that must be paid to them to keep them at your firm.”

a.Both statements are false

b.Statement 1 is true, but 2 is false

c.Statement 2 is true, but 1 is false

d.Both statements are true

Answer 1

Correct option. c.Statement 2 is true, but 1 is false

Incentives are always desirable because when an employee is paid more for the more work or efficiency that he have proved in the productivity. But it is not always true that if the employers reward are increased then the profitability will be increased because at a time all employees may not be working at their best and therefore the extra productivity that one employee has made will be nullified by another unproductive employee.
For the 2nd statement. AN extra amount paid due to the the extra effort by an employee if matches the with the extra money that it is earned as revenue from the extra production then we know that the profit is maximized because the marginal cost will be equal to the marginal revenue.
Therefore statement 1 is false but statement 2 is true.

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