Since a firm in a monopolistically competitive market faces a

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In a monopolistically competitive market, firms face a downward-sloping demand curve because they produce differentiated products. This means that they have some market power and can set prices above their marginal costs. However, because there are close substitutes available from other firms, consumers are relatively price-sensitive. As a result, firms cannot charge a price that is significantly above their costs without losing customers to their competitors. This puts a limit on their ability to expand output and operate at the most efficient scale. Therefore, firms in monopolistically competitive markets will typically operate with excess capacity.

Since a Firm in a Monopolistically Competitive Market Faces a