How do the total, marginal, and average functions derived from Equation 14.56 differ from those in Example 14.4? Are costs always greater (for all levels of q) for the former cost curve? Why is long-run equilibrium price higher with the former curves? (See footnote 7 for a formal discussion.) A rise in costs for bicycle frame makers will alter the equilibrium described in Example 14.4, but the precise effect on market structure will depend on how costs increase. The effects of an increase in fixed costs are fairly clear—the longrun equilibrium price will rise and the size of the typical firm will also increase.

This latter effect occurs because a rise in fixed costs raises AC but not MC. To ensure that the equilibrium condition for AC = MC holds, output (and MC)

must also rise. For example, if a rise in shop rents causes the typical frame maker's costs to increase to TC=q3- 20q2 + lOOq + 11,616, (14.54)

it is an easy matter to show that MC = AC when q — 22. This rise in cost has therefore increased the efficient scale of bicycle frame operations by 2 bicycle frames per month. At q = 22, long-run average and marginal cost is 672, and that will be the long-run equilibrium price for frames. At this price QD = 2,500 - 3P = 484, (14.55)

so there will be room in the market now for only 22 (= 484 -r- 22) firms. The rise in fixed costs resulted not only in an increase in price but also in a major reduction in the number of frame makers (from 50 to 22).