If the price is $10 or greater, however, she produces an output at which price equals At any price below $10 per call, Madame LaFarge would shut down. Panel (a) of Figure 9.9 shows the average variableĬost and marginal cost curves for a hypothetical astrologer, Madame LaFarge, who is in the business of providing astrological consultations over the telephone. At prices below average variable cost, the firm’s output drops to zero. The firm’s supply curve in the short run is its marginal costĬurve for prices above the average variable cost. Provided that price exceedsĪverage variable cost, the firm produces the quantity determined by the intersection of the two curves.Ī supply curve tells us the quantity that will be produced at each price, and that is what the firm’s marginal cost curve tells us. In the model of perfect competition, we assume that a firm determines its output by finding the point where the marginal revenue and marginal cost curves intersect. Available under Creative Commons-ShareAlike 4.0 International License.
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