Last year the owner of an auto dealership changed her sales

Last year the owner of an auto dealership changed her sales manager\'s compensation plan. Previously, the manager received a fixed compensation. After the change, the manger\'s compensation was based on a percentage of sales. Compared to last year, sales have increased substantially but profits declined. Using economic analysis, explain the outcome and then recommend additional changes that would correct the situation. Explain how incomplete information can cause market failure. Give at least one example of this type of market failure and explain how government intervention has been used to correct the problem. How effective has this form of intervention been Use the material from this course to support your answer.

Solution

Answer3:

Owner of Auto dealership has changed the compensation of the manager and manager now gets a compensation based on the percentage of sales. Compared to last year\'s sale sales have increased but profits have decreased. The new compensation depends on the percentage of sales so now manager becomes more interested to sell more products in the market so as to increase his compensation. So, sales increase more than the previous year but at the same time cost of the firm also increases. Variable cost depends on the labor wage that has increased now due to high sale and changed pattern of compensation. Profit is the revenue minus cost that has decreased due to the increasing cost due to increasing labor wage.

This problem can be solved by implementing new policies like compensation of managers must depend on the profit that means he will get some fixed amount of compensation and some portion of money as a profit percentage if he can increase the sales of the product. fixed compensation make him benefited and the incentive portion make him interested in increasing sales of the product that helps the company.

Answer4:

Incomplete information can cause market failure. One example of incomplete information is lending loan to a customer. Lender does not have ideas about the borrower\'s commitments and the risky factor of the project for which the borrower is ready to take loan. This problem is called the problem of incomplete information.

This problem can be solved by taking few steps like taking mortgage from the borrowers so if they cannot repay the loan in future, lenders can sell those mortgage and compensate themselves.

Sometimes lenders verify teh borrowers\' project for which they are taking loans and set the interest rate as high as possible so as to reduce the risk of not getting money back to them. Depending on the risks factors lenders set the interest rate of the loans.