Question 16
Theory of SupplyWhich of the following reasons explains the upward sloping supply curve in a competitive market?
- A.Ceteris paribus, marginal cost increases as output increases
- B.As new firms enter the market, factor prices move up
- C.Firms are in business to satisfy consumers
- D.Marginal cost often increases in a competitive market
- E.Firms are in business to produce goods.
Show the answer and explanation
Answer: A (Ceteris paribus, marginal cost increases as output increases)
Explanation
A competitive firm's supply curve is its rising marginal cost curve, so a higher price is needed to cover the higher cost of extra output.