Consider this situation. Julie is the owner of an airport shuttle. The shuttle transports passengers between Bowling Green and Nashville Airport. Most customers pay with cash because there is a big discount. Since she is old and spends most of her time in Florida, she hired Mark, as the only employee and driver. Julie is far away from Bowling Green, therefore she has to believe Mark unless there is unambiguously clear evidence against Mark’s claim/report. Assume that Mark is rational (in economics, rational is synonymous with selfish) and he will always cheat on Julie if doing so is beneficial (increasing his monetary benefits).

Julie is considering the following five possible compensation methods:

I) Pay Mark a flat salary (e.g., $3,500 each month)

II) Pay Mark an amount equal to reported revenue less a fixed amount

(e.g., reported revenue less than $3,000; negative pay if reported revenue < $3,000)

III) Pay Mark a certain percentage of sales (e.g., 30% of reported fares from passengers)

4. Pay Mark on an hourly basis (e.g., $25 per hour * Reported work hours)
5. Pay Mark based on the mileage (e.g., $0.30 for each mile added in the mileage gauge)
6. Pay Mark based on his efforts (how hard he works)

Julie is trying to find the best method in avoiding potential cheating by Mark.

Required:

A. Which of the following methods is the best one as far as the owner Julie is concerned? And why?

B. For each of the other 5 methods (the ones you did not choose in A), explain why it is not good for Julie.