What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?

A. A firm's marginal cost curve is equal to its supply curve for all prices

B. A firm's marginal cost curve is equal to its supply curve for prices above average total cost

C. A firm's marginal cost curve is equal to its supply curve for prices above average variable cost

D. A firm's marginal cost curve is upward sloping with twice the slope of its supply curve

E. A firm's marginal cost and supply curves are horizontal lines equal to the market price.

Question

Business

Kylan Lane

14 March, 18:03

What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?

A. A firm's marginal cost curve is equal to its supply curve for all prices

B. A firm's marginal cost curve is equal to its supply curve for prices above average total cost

C. A firm's marginal cost curve is equal to its supply curve for prices above average variable cost

D. A firm's marginal cost curve is upward sloping with twice the slope of its supply curve

E. A firm's marginal cost and supply curves are horizontal lines equal to the market price.

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Answers (1)

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Alexzander Houston · Answer 1

C) A firm's marginal cost curve is equal to its supply curve for prices above average variable cost

Explanation:

A perfectly competitive firm maximizes its profit when its marginal cost = marginal revenue. In the short run, it will continue to produce even if the marginal revenue is lower than its marginal costs, as long as the marginal costs are ≥ average variable costs.

Therefore, all perfectly competitive firms should supply products or services following its marginal cost curve as long as the price ≥ average variable costs.