Managerial Economics Chapter 5 / 6 Homework

1. You are the manager of a firm that sells output at a price of $40 per unit. You are interested in hiring a new worker who will increase your firm's output by 2,000 units per year. Several other firms also are interested in hiring this worker.

a. What is the most you should be willing to pay this worker to come to your firm?

• Hiring the new worker will result in increased production of: 2,000 units x $40 per unit= $80,000 of increased revenue. The main goal of hiring the worker is to increase marginal benefit. Therefore, you should be willing to pay the worker any amount less than $80,000 as this will guarantee a marginal benefit from the increased labor.

b. What will determine whether or not you actually have to offer this much to the worker to induce him to join your firm?

• The worker will choose to work for whichever company makes the best salary offer. Other companies will only offer the worker a salary which allows them to make positive marginal revenue from the increased labor. Our company could offer up to $79,999 in salary and still have positive marginal revenue from the hire. Based on the marginal revenue calculations of the other companies, we may be able to offer more than any other employer. If our closet competition in terms of salary offered is only able to offer the worker $59,000 because any higher salary would lead to negative marginal revenue, we would be able to hire the worker for only $60,000 even though we would be able to pay significantly more.

2. Discuss the benefits and costs of the following methods of monitoring worker performance.

a. Hidden video cameras in the workplace.

• As a solution to the Principal-Agent Manager-Employee problem, the effectiveness of video camera installation is dependent on the type of work employees are performing. The benefit of installing video cameras is that spot-checks can be performed on an interval basis to assess whether employees are at their workstations or not. Since the presence of video cameras means that managers do not need to personally check on employees, efficiencies are created in that all employees can be monitored simultaneously and employees can never be sure what periods of camera footage will be reviewed.

The costs of using a spot-check method involving a camera system are multi-level. Firstly, the entire system communicates to the employees that they are not trusted and are being watched. A culture created by such a system can breed mistrust of management and an "us versus them" attitude which is not conducive to improved