Question

5. Explain the relationship between a firm’s short run supply curve and its MC.

6. Why might a firm remain in business in the short run even if incurring a loss but always leave the industry if incurring a loss in the long run?

Answer 1

5) A short-run supply curve of a firm indicates the amount of output an individual firm will supply at different price levels. A competitive firm's supply curve in the short-run is its marginal cost curve above the minimum of its average variable costs. Horizontally summation of the marginal costs from existing firms provides the short-run industry supply curve and displays the amount of output an entire industry will supply at different price levels

?

6) In the short run, the fixed costs of the firm are sunk thus must pay its fixed costs regardless of whether or not it decides to shut down. Thus in the short run if revenues are exceeds variable costs, however not total costs, the firm is better off producing in the short run rather than shutting down. In the long run, all costs become variable, and therefore all costs must be covered if the firm is to remain in business.