Mr. Bayfront has a listing to sell a townhouse. When sold, his commission will equal 3% of the selling price. These townhouses sell quickly when they are priced at $120,000, but it can take months of hard work for a realtor to find a buyer who is willing to pay $130,000. Your client, the owner, has told Mr. Bayfront that she ideally will obtain a $130,000 selling price but will carefully consider any offer that is above $120,000.
a. Does Mr. Bayfront, the realtor, have a conflict of interest if a buyer makes a $120,000 purchase offer?
b. Assume that Mr. Bayfront can sell this townhouse for $120,000 by spending an average of 20 hours of marketing effort, but can sell this townhouse for $130,000 only if he spends 60 hours of marketing effort. What is Mr. Bayfront's compensation per hour at each of these two sales prices?
c. What is the client's optimal price?
d. Can you think of a different compensation structure that will better align the realtor's incentives with the homeowner's goals?