The competitive firm’s supply curve is equal to
A its marginal cost curve.
B the portion of its marginal cost curve that lies above AC.
C the portion of its marginal cost curve that lies above AVC.
D the portion of its marginal cost curve that lies above AFC.
The correct answer and explanation is :
The correct answer is C: the portion of its marginal cost (MC) curve that lies above average variable cost (AVC).
Explanation:
In a perfectly competitive market, firms are price takers, meaning they accept the market price and decide how much to produce based on maximizing their profits. The basic rule for profit maximization is that firms produce the quantity where marginal cost (MC) = market price (P).
However, just knowing where MC = P is not enough to fully describe the firm’s supply curve. We also need to know when a firm will choose to produce at all. Here’s where average variable cost (AVC) comes in.
- If the market price is above AVC, the firm covers its variable costs and contributes to fixed costs, so it stays in the market in the short run.
- If the market price is below AVC, the firm would lose more money by producing than by shutting down, because it wouldn’t even cover its variable costs. Thus, it will shut down and produce zero output.
Therefore, the firm’s short-run supply curve is the portion of its MC curve that lies above the minimum point of the AVC curve. Below that point, the firm supplies zero output.
Other options are wrong because:
- (A): The MC curve alone is not the supply curve — only part of it above AVC is.
- (B): The MC curve above average cost (AC) is relevant for long-run supply, not short-run.
- (D): The average fixed cost (AFC) is not the determinant for shutdown decisions — fixed costs are sunk in the short run.
Thus, understanding the relationship between MC, AVC, and price is key to understanding how a firm’s supply curve is determined in perfect competition.