Question

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.

Answer 1

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

Step-by-step 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.