In contrast with perfect competition, excess capacity characterizes monopolistic competition.Excess capacity is due to which of the following?
A)Monopolistically competitive firms produce at the minimum point on their average total cost curves.
B)Monopolistically competitive firms face downward-sloping demand curves. In the long run, firms produce where their demand curves are tangent to their long-run average total cost curves.
C)Monopolistically competitive firms produce where marginal revenue is equal to marginal cost.
D)Monopolistically competitive markets have low barriers to entry.

Question

Quizplus · Accepted Answer

Excess capacity in monopolistic competition occurs because firms have downward-sloping demand curves and produce where their demand curves are tangent to their long-run average total cost curves. This means that they are not producing at their minimum point of average total cost, resulting in excess capacity. Option A is incorrect because producing at the minimum point of their average total cost curve would result in efficient production and no excess capacity. Option C is incorrect because producing where marginal revenue equals marginal cost is the profit-maximizing level of production, but it does not necessarily result in excess capacity. Option D is irrelevant to the question.

In Contrast with Perfect Competition, Excess Capacity Characterizes Monopolistic Competition