Question

Suppose the following data summarize the costs of a perfectly competitive firm. What does the firm's marginal cost curve represent?

Option a: The average cost of production
Option b: The total fixed costs
Option c: The additional cost per unit produced
Option d: The variable costs only

Answer 1

The marginal cost curve represents the additional cost per unit produced and becomes a perfectly competitive firm's supply curve from the minimum point on the average variable cost curve.

Step-by-step explanation:

The firm's marginal cost curve represents the additional cost per unit produced. The curve is crucial to a firm's decision-making process in a perfectly competitive market. As price equals marginal revenue for such firms, they will maximize profits by producing at the quantity where price (P) equals marginal cost (MC). Importantly, the marginal cost curve becomes the firm's supply curve starting from the minimum point on the average variable cost curve. This is because the firm will not produce at a level where the price is below this point, as it would not cover the variable costs of production.

In summary, to decide what quantity to produce, a perfectly competitive firm will look at the market price and its marginal cost curve to ensure profit maximization. This correlation between marginal cost and the firm's supply curve helps determine the most advantageous level of output.