Figure: Profit Maximization in Monopolistic Competition
(Figure: Profit Maximization in Monopolistic Competition) In panel B of the figure Profit Maximization in Monopolistic Competition, the profit-maximizing price is P₂ and the ATC curve is tangent to the new demand curve.The portion of the ATC that lies to the right of the tangency and continues down to the intersection of MC with ATC indicates:
A)that the firm is experiencing an economic loss.
B)that the firm is earning an economic profit.
C)overutilization.
D)excess capacity.

Question

Quizplus · Accepted Answer

The portion of the ATC curve to the right of the tangency point indicates excess capacity, as the firm is not producing at the minimum point of the ATC curve, which is typical in monopolistic competition.