It has been argued that because the monopolistic competitive firm faces a downward-sloping demand curve, in long run equilibrium it
A)underutilizes its plant size.
B)has excess capacity.
C)produces an output smaller than the one that would minimize its costs of production.
D)a and b
E)all of the above

Question

Quizplus · Accepted Answer

In long-run equilibrium, a monopolistically competitive firm faces a downward-sloping demand curve, leading to underutilization of its plant size (A), excess capacity (B), and production at an output level smaller than the one that would minimize its costs (C). This is because the firm has some degree of market power, which allows it to set prices above marginal cost, but the presence of many firms in the market with similar but differentiated products ensures that each firm faces a downward-sloping demand curve. This scenario leads to inefficiencies such as those described in options A, B, and C.

It Has Been Argued That Because the Monopolistic Competitive Firm