Three hundred firms supply the market for paint. For fifty of the firms, their short-run average variable costs are minimized at $10 and short-run total costs are minimized at $15. For the remaining firms, the short-run average variable costs and short-run average total costs are minimized at $20 and $25, respectively. If each firm has a U-shaped marginal cost curve then the short-run market supply curve is:

Question

Quizplus · Accepted Answer

The short-run market supply curve is determined by the marginal cost curves of the firms in the market. Since firms will start to supply to the market when the price covers their marginal costs, and given that the marginal cost curve intersects the average variable cost curve at its minimum, the kink in the market supply curve will occur at the lowest price at which the largest number of firms start producing. In this case, for 250 firms, this price is $20, where their short-run average variable costs are minimized, indicating that they will start supplying to the market at this price.

Three Hundred Firms Supply the Market for Paint