The short-run equilibrium of the firm under monopolistic competition has excess capacity.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power and are able to charge a price above marginal cost. However, they do not have as much market power as monopolies. As a result, firms in monopolistic competition are able to sell some of their output at a price above marginal cost, but they operate at a point where marginal revenue equals marginal cost and price exceeds marginal cost. This means that they produce less than the output level that would minimize average total cost, resulting in excess capacity. Therefore, the statement is true.

The Short-Run Equilibrium of the Firm Under Monopolistic Competition Has