6. The effect of changing conditions on SR and LR equilibrium Suppose that the shovel industry is in long-run equilibrium, and all firms are identical (even potential entrants) and earning zero profit. In the short run, the number of machines available to produce shovels is fixed, so labor is the only variable input. Also, each year firms must pay the government a fee in order to continue operations. In the short run, these fees are considered sunk costs once paid, but in the long run, they are considered real economic costs. The following graphs show the demand and short-run supply of shovels and the cost curves for an individual firm in the industry in the long run. (?) ? Short-Run Market Individual Firm in the Long Run Demand Supply P P COST (Dollars per shovel) PRICE (Dollars per shovel) MC QUANTITY (Shovels) OUTPUT (Shovels)Suppose the annual fee (or long-run fixed cost) decreases. Complete the following table by indicating how this affects the costs and industry conditions in the short run and the long run. Note: When completing the column for the short run, do not include any changes in short-run conditions when moving to the long run. In other words, determine only the initial short-run effects of this change in industry conditions. Also, when completing the column for the long run, compare the outcome to that of before the change in industry conditions, not to the short-run outcome. Change in Short Run Long Run Costs AC Decrease Decrease MC No change Decrease Industry conditions Market price Increase Decrease Industry output No change Decrease Firm conditions Not enough information Firm output Decrease Number of firms N/A Increase Grade It Now Save & ContinueSuppose the annual fee (or long-run fixed cost) decreases. Complete the following table by indicating how this affects the costs and industry conditions in the short run and the long run. Note: When completing the column for the short run, do not include any changes in short-run conditions when moving to the long run. In other words, determine only the initial short-run effects of this change in industry conditions. Also, when completing the column for the long run, compare the outcome to that of before the change in industry conditions, not to the short-run outcome. Change in Short Run Long Run Costs AC Decrease Decrease MC No change Decrease Industry conditions Market price No change Increase Industry output No change No change Firm conditions Not enough information Firm output No change Number of firms N/A Increase Grade It Now Save & Continue