The excess capacity theorem states that a monopolistic competitor
A)will produce an output level smaller than the one that would minimize its unit costs.
B)will produce an output level where MR MC.
C)generally does not attain long run equilibrium, and thus charges a higher price than it should.
D)typically produces too much of a good at too low a quality.

Question

The excess capacity theorem states that a monopolistic competitor
A)will produce an output level smaller than the one that would minimize its unit costs.
B)will produce an output level where MR > MC.
C)generally does not attain long run equilibrium, and thus charges a higher price than it should.
D)typically produces too much of a good at too low a quality.

Quizplus · Accepted Answer

The excess capacity theorem suggests that a monopolistic competitor operates with excess capacity because it produces at an output level smaller than the one that would minimize its average total costs, thus not achieving productive efficiency. This is due to the downward-sloping demand curve it faces, leading it to produce where marginal revenue equals marginal cost, which is at a lower quantity than the minimum average total cost.

The Excess Capacity Theorem States That a Monopolistic Competitor