Advanced Economics(resoponses to economyst to my q
posted by John
although diseconomies of scale may not result in a rising marginal cost (but it is certain for AC,right?), Law of diminishing returns cause the rise of MC indirectly. Under this situation, WHY P did not rise(Price rigidity)?Because P=mc in equilibrium, if MC rises, P should rises also,then there should not be price rigidity.
BUT the case why Law of diminishing returns doesn't apply cause the rise of P and thus MC?WHAT IS THE rationale behind this keynes assumption?
thx foy your patient reading and answer!
Im having trouble understanding your question. That said:
1) if AC is rising, MC must also be rising -- by definition. Further, I cannot think of a circumstance where there is dis-economies of scale and MC not rising.
But I can think of reasons why MC could rise while P remains constant. Consider a firm selling in a perfectly competitive market. For the firm Price is given. The firm produces where MC=P. Now then suppose something happens and MC for the firm goes up (meaning the whole MC curve shifts upward). In this scenario, nothing happens to price; the firm will produce less than before.
Now then, in the Keynes scenario, he assumed there was wage rigidity; that firms could not lower a person's wages. (wage rigidity caused by contracts or by the belief that a riot would ensue if a firm suddenly cut wages).
I hope this helps.