Excess capacity typically occurs
A)in the short run in perfect competition
B)in the short run in monopolistic competition
C)in long-run equilibrium in perfect competition
D)in long-run equilibrium in monopolistic competition
E)usually in markets experiencing an increase in demand

Question

Quizplus · Accepted Answer

Excess capacity occurs in long-run equilibrium in monopolistic competition. This is because firms in monopolistic competition have some market power due to product differentiation, but they operate under the assumption of free entry and exit of firms in the industry. As such, in long-run equilibrium, firms will continue to enter the industry until the profit margins for each firm are just enough to cover their costs, resulting in excess capacity.

Excess Capacity Typically Occurs