A monopolistically competitive firm is said to produce with excess costs in the long run because
A)the average fixed cost of production is greater than the minimum average fixed cost.
B)the firm will incur a loss and therefore needs to bring down costs.
C)the average total cost of production is greater than the minimum average total cost.
D)price is greater than marginal revenue.
E)there are too many firms in the market.

Question

Quizplus · Accepted Answer

In the long run, a monopolistically competitive firm will produce with excess costs because the average total cost of production is greater than the minimum average total cost. This is because firms in monopolistic competition produce differentiated products, which leads to a lack of perfect substitutes and allows them to charge a higher price. However, this also means that they have less control over their price because they must consider the potential reactions of their competitors. As a result, they cannot fully exploit their market power to maximize profits, and their average costs remain higher than those of a perfectly competitive firm.

A Monopolistically Competitive Firm Is Said to Produce with Excess