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Chapter 8: Q6 (page 211)

A firm鈥檚 marginal cost curve above the average variable cost curve is equal to the firm鈥檚 individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm鈥檚 individual supply curve if marginal costs increase?

Short Answer

Expert verified

Marginal Cost increase will shift MC curve upwards, and so supply curve leftwards & decrease demand.

Step by step solution

01

Definitions 

Supply is the quantity a seller is willing and able to sell, at given price & period of time.

Marginal Cost is the additional cost incurred on producing an additional level of output.

Perfect competition equilibrium condition is Marginal Revenue = Marginal Cost, & marginal revenue = price. So, Marginal Cost = Price & curves and rising part of MC above shut down point AVC is the supply curve itself.

02

Marginal Cost Concept 

Increase in marginal cost for values of quantity produced leads to upward shift of marginal cost curve.

This implies that - the rising portion of marginal cost curve above AVC, ie supply curve also shifts upwards and leftwards.

Leftwards shift in supply curve denotes decrease in supply, ie lower supply for all levels of price, due to increased cost of production.

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Most popular questions from this chapter

Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for \(72 each. The fixed costs of production are \)100. The total variable costs are \(64 for one unit, \)84 for two units, \(114 for three units, \)184 for four units, and $270 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit-maximizing quantity?

Suppose that the market price increases to $6, as Table 8.14 shows. What would happen to the profit-maximizing output level?

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Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?

Would independent trucking fit the characteristics of a perfectly competitive industry?
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