The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11- 3
-Refer to Figure 11- 3.Which of the following is a demonstration of the excess- capacity theorem?

Question

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11- 3
-Refer to Figure 11- 3.Which of the following is a demonstration of the excess- capacity theorem?

Quizplus · Accepted Answer

The excess-capacity theorem states that monopolistically competitive firms will produce at a quantity less than the one that minimizes long-run average cost. In this case, Q1 is less than Q2, which demonstrates the excess-capacity theorem. Additionally, LRAC at Q1 is not at its minimum, which further supports the theorem. Therefore, both C and D demonstrate the excess-capacity theorem.

The Diagram Below Shows Demand and Cost Curves for a Monopolistically