Suppose that an economy wants to eliminate the resource waste associated with excess capacity in monopolistically competitive markets.Which of the following would achieve this goal?
A)Firms are allowed to establish significant barriers to entry.
B)Firms are encouraged to produce less output.
C)Firms are required to set price equal to marginal cost.
D)Firms are required to charge the same price.

Question

Quizplus · Accepted Answer

Requiring firms to set price equal to marginal cost would eliminate the profit margins that allow firms to operate with excess capacity. In turn, this would force firms to operate at their efficient scale and eliminate the waste associated with excess capacity. Allowing firms to establish significant barriers to entry (choice A) would likely exacerbate the problem, leading to even greater excess capacity in the long run. Encouraging firms to produce less output (choice B) would also likely lead to inefficiencies and economic waste. Requiring firms to charge the same price (choice D) would not necessarily eliminate excess capacity, as firms with different cost structures may operate at different levels of output.

Suppose That an Economy Wants to Eliminate the Resource Waste