Narrbegin Exhibit 7.9 A typical firm in a perfectly competitive market
-Refer to Exhibit 7.9 and assume the perfectly competitive firm is in long-run equilibrium and there is an increase in demand. Along which cost curve, in the short run, will the firm increase output?

Question

Narrbegin Exhibit 7.9 A typical firm in a perfectly competitive market  
-Refer to Exhibit 7.9 and assume the perfectly competitive firm is in long-run equilibrium and there is an increase in demand. Along which cost curve, in the short run, will the firm increase output?

Quizplus · Accepted Answer

In the short run, the firm will increase output along the short-run marginal cost curve B. This is because, in the short run, the firm is unable to change its fixed inputs, and as demand increases, it will need to increase production by using more of its variable inputs, which are represented by the short-run marginal cost curve. The firm will continue to produce as long as the price is greater than or equal to the short-run average variable cost curve, which corresponds to the shutdown point. The long-run average cost curve is not relevant in the short run since the firm cannot adjust its fixed inputs.