The following diagram presents the marginal cost (MC) and average cost (AC) typical firm in the textile (T) industry.On the right the market demand curve for textiles is presented.The textile industry is a perfectly competitive industry.

a.Demonstrate on the diagram the long run equilibrium price, typical firm output, and the market equilibrium quantity.

b.What are long run firm profits?

c.What is the minimum price where a typical firm would stay in business in the short run?

Now assume that there is a technological innovation that reduces the fixed costs for the typical firm by 50%, but has no effect on marginal costs.

d.Demonstrate on the diagram what effect (if any) there will be on long run equilibrium price, typical firm output, and the market equilibrium quantity.

e.What are the new long run firm profits?

f.Given your answer to e., why do firms adopt new innovations?

g.What happens to firms who do not adopt new innovations?

h.If moving firm production to another country with lower labor costs can be treated as a technological innovation, what happens to firms that don't move their production to another country?