"In equilibrium, a monopolistic competitor will produce an output level that is less than the level that would minimize its average total costs." This is a statement of the
A)law of diminishing returns.
B)law of second best.
C)law of variable proportions.
D)excess capacity theorem.

Question

Quizplus · Accepted Answer

The excess capacity theorem states that in monopolistic competition, firms produce at an output level that is less than the level that would minimize average total costs, leading to excess capacity. This is because firms in monopolistic competition face downward-sloping demand curves and choose the output level where marginal cost equals marginal revenue, which typically does not coincide with the minimum of the average total cost curve.

"In Equilibrium, a Monopolistic Competitor Will Produce an Output Level