Question

Under perfect competition, the short-run supply curve of an individual profit-maximizing firm corresponds to which of the following segments?

• A. The rising portion of the Short-run Marginal Cost (SMC) curve at and above the minimum point of the Average Variable Cost (AVC) curve.
• B. The entire upward-sloping region of the Short-run Average Cost (SAC) curve.
• C. The downward-sloping portion of the Short-run Marginal Cost (SMC) curve.
• D. The rising portion of the SMC curve above the minimum point of the Average Fixed Cost (AFC) curve.

Hint:

The portion of the MC curve above the minimum AVC point represents the short-run supply curve of a perfectly competitive firm.

Answer 1

The Correct Option is A

Concept: Under perfect competition, a firm is a price taker and maximizes profit where: \[ P = MC \] provided the marginal cost curve is rising. In the short run, the firm continues production only if price is sufficient to cover the Average Variable Cost (AVC). Therefore, the short-run supply curve is closely related to the rising part of the Marginal Cost (MC) curve above the shutdown point.

Step 1: Understand the profit-maximization condition.
A perfectly competitive firm chooses output where: \[ P = SMC \] where \(P\) is market price and \(SMC\) is Short-run Marginal Cost. However, only the upward-sloping part of the SMC curve is considered because the marginal cost curve must be rising at equilibrium for profit maximization.

Step 2: Apply the short-run shutdown condition.
In the short run, fixed costs are unavoidable. Therefore, the firm will continue production only if: \[ P \ge \text{AVC} \] If: \[ P < \min(\text{AVC}) \] the firm shuts down because it cannot even recover its variable costs. Thus, the minimum point of the AVC curve is called the shutdown point.

Step 3: Identify the short-run supply curve.
Since the firm supplies output according to: \[ P = SMC \] and production occurs only when: \[ P \ge \min(\text{AVC}) \] the firm's short-run supply curve is: \[ \text{The rising portion of the SMC curve above the minimum AVC point} \] Hence, the correct answer is: \[ \boxed{\text{(A)}} \]