Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 14 - Part V - Firms in Competitive Markets - Quick Check Multiple Choice - Page 296: 3

Answer

C

Work Step by Step

Marginal cost curve is said to be a firm's supply curve because each point in the marginal cost curve shows how much a firm will spent for each unit of production of a particular commodity. More the production, more will be the cost per additional unit of production (See Law of Variable proportions to understand this). Hence the firm will produce more only if the price keeps increasing with increase in marginal cost. This is why a firm's supply curve is its Marginal cost curve. In the short run when a firm cannot recover its fixed  costs, the firm will choose to shut down temporarily if  the price of the good is less than average variable cost.  In the long run when the firm can recover both fixed and  variable costs, it will choose to exit if the price is  less than average total cost. Hence, the supply curve of a firm is always above the average total cost.
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