A purely competitive firm's short-run supply curve is
A) perfectly elastic at the minimum average total cost.
B) upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
C) upsloping and equal to the portion of the marginal cost curve that lies above the average total cost curve.
D) upsloping only when the industry has constant costs.

Question

Quizplus · Accepted Answer

In the short run, a perfectly competitive firm's supply curve is the portion of the marginal cost curve that lies above the minimum point of the average variable cost curve (i.e., the shutdown point). This is because, in the short run, the firm must cover its variable costs to stay in business, and it will only produce if price is high enough to cover at least its variable costs. Therefore, the short-run supply curve is upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve. Option (A) is incorrect because the short-run supply curve can be upsloping, and doesn't have to be perfectly elastic. Option (C) is incorrect because the short-run supply curve is based on the marginal cost curve, not the average total cost curve. Option (D) is incorrect because the short-run supply curve is not affected by whether the industry has constant costs or not; it only depends on the firm's own production costs.

A Purely Competitive Firm's Short-Run Supply Curve Is