The excess capacity in monopolistic competition may be viewed as:
A) the cost of product diversity.
B) efficient.
C) the reason P = MR = MC in monopolistic competition.
D) all of the above.

Question

Quizplus · Accepted Answer

Excess capacity in monopolistic competition is the result of firms producing at a smaller scale than what would minimize their long-run average total cost. This is due to the cost of product differentiation and advertising, which is necessary to create brand identity and attract customers in a crowded marketplace. As a result, firms have some unused resources that can be seen as a cost of diversity. This excess capacity is not efficient because it means that some resources are not being utilized to their fullest potential. P = MR = MC is still the profit-maximizing rule in monopolistic competition because firms still need to cover their marginal costs with their prices.

The Excess Capacity in Monopolistic Competition May Be Viewed As