Question

The short-run supply curve of a firm is:

• A. The downward-sloping portion of the SMC curve
• B. The rising portion of the SMC curve above the minimum AVC
• C. The entire SMC curve
• D. The portion of the SMC curve below AVC

Hint:

Short-run supply curve: \[ \mathrm{SMC\ above\ minimum\ AVC} \] Shutdown condition: \[ P<AVC \]

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
A firm's supply curve shows how much quantity the firm is willing to produce at different prices. In a competitive market, a firm maximizes profit where Price (\(P\)) \( = \) Marginal Cost (\(MC\)).
Step 2: Detailed Explanation:
In the short run, a firm has fixed costs that must be paid regardless of whether the firm produces or not. However, the firm will only produce if it can at least cover its Average Variable Cost (AVC).
If \(P<\text{min AVC}\):
The firm will lose more by producing than by shutting down. For example, if it costs \$10 in labor and materials to make a widget (variable cost) but the widget only sells for \$8, the firm loses \$2 on every unit just in production, on top of its fixed rent. Thus, it supplies zero quantity.
If \(P \geq \text{min AVC}\):
The firm will follow its Marginal Cost curve to decide how many units to produce. The condition for profit maximization is \(P = SMC\), and for this to be a maximum, the \(SMC\) must be rising.
If the \(SMC\) were falling, the firm could increase profit by producing one more unit because the cost of the next unit would be even lower.
Step 3: Final Answer
Therefore, the firm's short-run supply curve is identified as the segment of the Short-run Marginal Cost (\(SMC\)) curve that is upward-sloping and lies above the minimum point of the Average Variable Cost curve.