For a perfectly competitive firm that does not shut down, the supply curve is a. the portion of the marginal cost curve at or above its average variable cost curve. b. the portion of the marginal revenue curve above its marginal cost curve. c. the portion of the marginal cost curve above its average cost curve. d. equal to its average variable cost curve. e. the same as the demand curve that the firm faces.

The correct answer is   A)

For a perfectly competitive firm that does not shut down, the supply curve is the portion of the marginal cost curve at or above its average variable cost curve.

Explanation:

For a perfectly competitive firm, the marginal cost curve is similar to the firm’s supply curve starting from the minimum point on the average variable cost curve.

To understand why this perhaps surprising insight holds true, first think about what the supply curve means.

A firm checks the market price and then looks at its supply curve to decide what quantity to produce.

Now, think about what it means to say that a firm will maximize its profits by producing at the quantity where P = MC. This rule means that the firm checks the market price, and then looks at its marginal cost to decide what quantity to produce—and ensures that the price is greater than the minimum average variable cost.

In other words, the marginal cost curve above the minimum point on the average variable cost curve becomes the firm’s supply curve.

Cheers!