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Managerial Economics         AT 2021

PROBLEM SHEET 3

Rents and Efficiency

1. How should doctors be paid?

2.  Black Box Tracking (BBT) is a growing hi-tech SME firm that has a workforce of just over one hundred directly employed staff, including 65 staff members in a call centre, focused on business-to-business sales of their asset tracking equipment.  This equipment is based on remote tracking technology, and is attached to items to track them anywhere in the world. At the moment, there is a very high staff turnover rate in the call centre, particularly in the call centre staff. The call centre staff form over 50% of the workforce, and have an average of five people leaving each month. Poor retention brings significant recruitment and onboarding costs for BBT and is also a barrier to the firm’s desire to grow its call centre team in order to increase its client base.  Moreover, much customer and industry knowledge is being lost every time a member of the call centre staff chooses to leave.  This is compounded because the customer data records that are maintained are very poor, with big gaps in information that is gathered and recorded.  For example, sometimes new sales staff call existing clients with little to no detail of what their interests are, which products they are hoping to add to their account in future, or any problems they have had with products in the past.  A huge amount of useful client knowledge is thus being wasted. Thus, there are plenty of reasons to be concerned about the high staff turnover.

You have been asked by management to recommend actions to reduce these problems. What would you suggest?

3. In the Shapiro-Stiglitz efficiency wage model suppose that there is some probability g that the worker will appear to be cheating even though (s)he actually has worked hard. Determine the proper efficiency wage in this case.

4. In the context of an industrial firm:

(a) What is meant by rent?

(b)  Suppose the government can accurately measure rent and imposes a 50% tax on rent. How would this affect the firm’s output and pricing decisions?

(c) What tax rate should the government choose?

(d)  Suppose the government imposes a 50% tax on quasi-rent.  How would this affect the firm’s output and pricing decisions?

5. Efficiency wages:         The theory of efficiency wages suggests that a firm can motivate workers by paying a wage which is above average. What would happen if all firms attempt to do this?