Suppose the wiz-pop market is in long-run equilibrium. Suddenly, fixed costs decrease, although variable costs remain unchanged. Discuss the short-run and long-run changes in market equilibrium.

What will be an ideal response?

The reduction in fixed costs reduces the average cost of production and thus decreases the efficient scale of production. In the short run, marginal costs do not change and the number of active firms is fixed, resulting in no change in the short run equilibrium. Thus, active firms make a positive profit in the short run. In the long run, new firms enter the market to take advantage of the profit opportunities. New firms continue to enter the market until profits are driven to zero. The entrance of new firms increases the long run supply, pushing down the price of the good and increasing the amount produced in the market.