A monopolistically competitive firm has excess capacity because in the

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In monopolistic competition, firms differentiate their products to establish market power and charge a higher price than perfect competition. Due to this, they usually have excess capacity, meaning that they produce at a level less than the one at which average total cost (ATC) is minimized. In the long run, a monopolistically competitive firm faces competition from similar firms that sell similar but slightly differentiated products, and this leads to a zero economic profit in the long run. However, because they operate at a level where ATC is not minimized, they have excess capacity. Therefore, in the long run, ATC exceeds minimum ATC, which is the point where production is efficient.

A Monopolistically Competitive Firm Has Excess Capacity Because in the