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ACTIVIST POLICY: Government policies that involve explicit actions designed to achieve specific goals. A common type of activist policy is that designed to stabilize business cycles, reduce unemployment, and lower inflation, through government spending and taxes (fiscal policy) or the money supply (monetary policy). Activist policies are also term discretionary policies because they involve discretionary decisions by government. A contrast to activist policy is automatic stabilizers that help stabilize business cycles without explicit government actions.

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Lesson 23: Factor Market Equilibrium | Unit 4: Monopsony Page: 17 of 24

Topic: Employment <=PAGE BACK | PAGE NEXT=>

  • The labor employment decision:

  • A firm maximizes profit when the additional cost of a decision is equal to the additional revenue, whether that decision is producing output or employing factor services.

  • The critical conclusion from this analysis is that a monopsony employs a factor such that marginal revenue product (MRP) is equal to marginal factor cost (MFC).

  • MRP = MFC
  • However, because this marginal factor cost (MFC) is greater than factor price (W) for monopsony, we have the secondary result that:

  • MRP > W
  • In other words, a perfectly competitive firm will hire workers up to the point where the extra revenue generated by the last worker is greater than the wage paid.


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PERFECT COMPETITION, PROFIT MAXIMIZATION

A perfectly competitive firm is presumed to produce the quantity of output that maximizes economic profit--the difference between total revenue and total cost. This production decision can be analyzed directly with economic profit, by identifying the greatest difference between total revenue and total cost, or by the equality between marginal revenue and marginal cost.

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