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FISCAL POLICY: Use of the federal government's powers of spending and taxation to stabilize the business cycle. If the economy is mired in a recession, then the appropriate fiscal policy is to increase spending or reduce taxes--termed expansionary policy. During periods of high inflation, the opposite actions are needed--contractionary policy. The consequences of fiscal policy are typically observed in terms of the federal deficit.

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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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TARIFFS

Taxes imposed by the government of one nation on imports from other nations. The primary goal of tariffs is to reduce imports and increase domestic production. As taxes, tariffs raise the demand price and lower the supply price, and thus reduce the quantity exchanged. Tariffs are one of three common foreign trade policies designed to discourage imports and/or encourage exports. The other two are import quotas and export subsidies.

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