Ii the required donation is a fixed cost that does

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(ii) The required donation is a fixed cost that does not depend on the number of donuts produced. Thus there is no shift in short-run supply and no short-run change in the equilibrium price and quantity of donuts. The new fixed cost will, however, lower firms' profitability and raise their break-even price, causing the long-run supply curve to shift up. Some firms will exit the industry and the short-run supply curve will shift to the left, causing the long-run price of donuts to rise and the quantity to fall as zero profits are reestablished. Therefore, donut firms bear the entire cost in the short run, while consumers bear the entire cost in the long run. This situation is illustrated in the accompanying diagram.
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3 (iii) In this situation, marginal cost has decreased by $0.5 per donut. Thus the short-run supply curve shifts down by $0.5 per donut, so the equilibrium price falls and the equilibrium quantity rises. However, the price does not fall by the full $0.5 per donut, so the decreased cost is split between consumers and firms in the short run. Firms' break- even price has also fallen by $0.5 per donut, so the new short-run price is greater than firms' new break-even price, which causes some new firms to enter the industry in the
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Christopher Reinemann
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