Final answer:
If a firm's marginal cost is increasing while the average variable cost is decreasing, the average total cost curve will eventually increase after the point where marginal cost intersects with average variable cost.
Marginal cost increases cause the individual supply curve to shift upwards, leading to higher equilibrium prices, but long-run adjustments can return prices to the zero-profit level.
Step-by-step explanation:
In the short-run, if the marginal cost (MC) of a firm in a competitive industry is increasing and the average variable cost (AVC) is downward sloping,
we can infer that the average total cost (ATC) curve may initially decrease but will eventually start to increase once MC intersects with AVC and continues to rise.
This is because the ATC is composed of both AVC and average fixed cost (AFC), and given the typical U-shaped curves of AVC and AFC, the ATC's minimum point will be at a quantity where MC starts to exceed AVC.
When a firm's MC increases, its individual supply curve shifts upwards. In a perfectly competitive market, firms supply output where the price (P) equals MC. Therefore, if MC rises,
firms will supply less output at each price level, causing a leftward shift of the supply curve. This results in a higher equilibrium price in the market, assuming demand remains constant. In the long run, however, market adjustments occur that can push the price back up to the zero-profit level, thereby stabilizing the industry.