Excess capacity alone does not necessarily indicate whether a market outcome is desirable or not. It simply means that a firm is producing less than its maximum possible output with given resources. Other factors such as consumer surplus and innovation should also be considered in evaluating the efficiency and desirability of a market outcome.

Solved

Excess Capacity

Question 98

Multiple Choice

Excess capacity

A) tells economists little about the desirability of a market outcome.
B) is the primary source of market inefficiency in monopolistically competitive markets.
C) is a characteristic of rising average total cost curves.
D) implies that the quantity demanded exceeds the quantity produced.

Correct Answer: