Advanced economics question(Keynes),HELP PLEASE?

1. except for the discovery of the changes in price level, what causes the equilibrium in Long run labour market,compared with the less sensitive adjustment of demand and supply in shortd in LR?
run labour market?

I have some confusion on concept abt this exam Q. I know the less sensitive adjustment of D&S can be caused by the contracts of labours to company , but in this case the labours still have to work due to contracts, then will the quantity transacted really drop? If not , the Qs still =Qd ,how come there is disequilibrium.

And for the reason of Labour union, how can be solve
Are there any other reasons?

2. Keynes assumes price rigidity cos lot of resources haven't been utilited, but what lead to p=mc(no change along cost curve) ? although lot of resources haven't been utilited, why diseconomy of scales doesn't apply?
in reality, mc should rises in the start of production very soon (regradless of how little the production is). also there should still have depreciation causing mc rise once production start(regradless of how little the production is)

it is a bit long, i would really appreciate if you can help ,thanks

I am struggling to understand your questions. In 1) are you asking why short-run adjustments to labor supply (and demand) are less senstive to long-run adjustments?

If so, there are a plentitude of reasons. In the SR, firms must draw from workers local to the firm. In the LR, they can draw laborers from far-away places. In the SR, the skill set of workers is fixed. In the LR, workers can be trained and re-trained. For something particular to Keynes, workers have contracts and such contracts have specified nonminal wage rates. Further, neither workers or firms would be willing to cut nominal wage rates. Thus, in the SR, wages and therefore worker levels are inflexible in the downward direction. Of course, in the LR, contracts are negotiable.

2) Again, I am having trouble understanding your question. Further, I disagree; economies of scale could certainly result in a declining marginal costs. That said, Keynes only assumed there would be price (wage) rigidity in the downward direction. Which, in a time of recession, the market would not automatically adjust -- unemployment would grow, consumption would fall, causing a further deepining of the recession. So, for Keynes, government spending was one obvious way out.

I hope this helps.

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!

Consider the utility function u = f (x1……xn) where xi, i =1,2,……., n are the quantities of the n goods consumed. Let the price of good xi be pi, I = 1, 2,…….., n. Let M be the consumer’s income. Show that the Lagrangian multiplier of the utility maximization problem equals the marginal utility of income.

Pata nai

To answer your first question about the equilibrium in the long-run labor market, there are a few factors to consider. In the long run, the labor market reaches equilibrium when the quantity of labor demanded (Qd) is equal to the quantity of labor supplied (Qs). Unlike the short run, where the adjustment of demand and supply may be less sensitive, the long-run labor market has some additional factors that contribute to its equilibrium.

One factor is the adjustment of wages. In the long run, wages can adjust to clear the labor market. If there is excess demand for labor (Qd > Qs), firms may face pressure to increase wages to attract more workers. On the other hand, if there is excess supply of labor (Qs > Qd), firms may have the bargaining power to lower wages. These adjustments in wages can help bring the labor market to equilibrium.

Regarding your question about labor contracts, it is true that labor contracts can create a binding commitment between employers and employees. However, in the long run, contracts may not be able to fully shield the labor market from changes in demand and supply. For example, if there is a decrease in the demand for labor due to changes in technology or market conditions, employers may not renew contracts or new contracts may reflect the lower demand, leading to a decrease in the quantity transacted.

Another factor that can impact the long-run equilibrium in the labor market is the presence of labor unions. Labor unions can negotiate higher wages and better working conditions for their members, which can result in a higher labor cost for firms. This can affect the demand for labor and potentially lead to disequilibrium. One potential solution to this issue could be collective bargaining between the labor unions and employers to find a mutually beneficial agreement.

To address your second question about Keynesian assumptions and price rigidity, it is important to note that Keynes assumes price rigidity in the short run due to various reasons such as menu costs, wage contracts, and psychological resistance to price changes. This assumption helps to explain why changes in aggregate demand may have a larger impact on output and employment in the short run.

In the long run, however, prices are assumed to be more flexible as firms and individuals have more time to adjust their behavior. The assumption of prices equaling marginal cost (p=mc) in the long run implies that firms are operating at their cost-minimizing level of production. In this scenario, output is at its maximum level given the available resources and technology.

You mentioned concerns about the applicability of diseconomies of scale and the behavior of marginal cost (mc) in reality. While it is true that marginal cost may initially rise as production increases, due to factors such as fixed costs and economies of scale, there is a level of production beyond which marginal cost may start to increase again. This is known as diseconomies of scale, where the cost per unit of output starts to rise.

However, in the long run, firms have more flexibility to adjust their inputs and processes to achieve cost efficiencies and minimize the impact of diseconomies of scale. This can contribute to the assumption of p=mc in the long run, where firms are able to produce at their cost-minimizing level of output.

It's worth noting that economic theories, including Keynesian economics, make simplifying assumptions to explain complex real-world phenomena. While these assumptions may not capture every detail of reality, they provide valuable insights into economic behavior and help in understanding the overall functioning of markets.

I hope this explanation helps clarify your questions. If you have any further doubts, feel free to ask!