The correct answer is: C. The short-run supply curve of the industry cannot be downward sloping.
A firm’s short-run supply curve is that portion of its marginal cost curve that lies above its average variable cost curve. This is because a firm will only produce in the short run if the price is above its average variable cost, as it must cover its variable costs in order to stay in business. The short-run supply curve of the industry is the horizontal summation of the individual firms’ short-run supply curves. Therefore, the short-run supply curve of the industry can be downward sloping if the firms in the industry have downward-sloping marginal cost curves.
The following are brief explanations of each option:
- A. The short-run supply curve of the firm is that portion of its marginal cost curve which lies above its average variable cost curve. This is correct, as explained above.
- B. The short-run supply curve of the firm is that portion of its marginal cost curve which lies above its average cost curve. This is incorrect, as the firm will only produce in the short run if the price is above its average variable cost, not its average cost.
- C. The short-run supply curve of the industry cannot be downward sloping. This is incorrect, as the short-run supply curve of the industry can be downward sloping if the firms in the industry have downward-sloping marginal cost curves.
- D. The short-run supply curve of the industry can shift upward or downward. This is correct, as the short-run supply curve of the industry will shift upward if the costs of production increase, and it will shift downward if the costs of production decrease.