Question

A firm’s marginal cost curve above the average variable cost curve is equal to the firm’s individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm’s individual supply curve if marginal costs increase?

Short answer

When the MC rises, the firm's price rises as well. As a result, as the MC rises, the firm's supply curve shifts to the right.

Step-by-step solution

Definition

Marginal Cost is the additional cost incurred to produce one more unit of the output.

Average Variable Cost is the ratio of total variable cost to the quantity produced.

Explanation

The firm's short-run supply curve is equal to its marginal cost.

Marginal cost = Price

When the MC increases, the price faced by the firm increases. Therefore, the supply curve of the firm shifts rightwards when the MC increases.