Question

Please give me an idea of why D is the correct answer with detail explanation

An industry analyst observes that in response to a small increase in price, a competitive firm's output sometimes rises a little and sometimes a lot. The best explanation for this finding is that

A) the firm's marginal cost curve is random.

B) the firm's marginal cost curve has a very small positive slope.

C) the firm's marginal cost has a very large positive slope.

D) the firm's marginal cost curve is horizontal for some ranges of output and rises in steps.

E) the firm's marginal cost curve is downward sloping.

Answer 1

It is given that output increases not continuously but in two different ways. For certain price levels the output rises only slightly, implying that the supply curve is almost vertical. For other price levels it rises a lot which means the supply curve is horizontal. This shows that supply curve is actually a step function

The marginal cost function for a competitive firm represents the supply curve. Due to the above mentioned behaviour the marginal cost is a step function, where in the marginal cost is horizontal for certain range of output and is vertical for another range of output. This happens because of the behaviour of output towards price.