Excess capacity in monopolistically competitive industries results because in equilibrium:
A) each firm's output level is too great to minimize average cost.
B) each firm's output level is too small to minimize average cost.
C) firms make positive economic profit.
D) price equals marginal cost.

Question

Quizplus · Accepted Answer

In monopolistically competitive industries, firms produce differentiated products, which leads to some market power but also creates excess capacity. In equilibrium, each firm's output level is too small to minimize average cost because they are not producing at the level of minimum efficient scale. This is due to the fact that each firm is producing a unique product that is not easily substituted for, thus creating some pricing power, but not enough to eliminate excess capacity. Therefore, excess capacity is a characteristic of monopolistically competitive industries in equilibrium.

Excess Capacity in Monopolistically Competitive Industries Results Because in Equilibrium