If a monopolistically competitive firm has excess capacity,
A)it has exhausted all economies of scale.
B)it is producing beyond the minimum efficient scale.
C)it is experiencing diseconomies of scale.
D)it produces a level of output that places it on the negatively sloped portion of its average total cost curve.

Question

Quizplus · Accepted Answer

If a monopolistically competitive firm has excess capacity, it means that the firm is producing less than the output level that would minimize its average total cost. This indicates that the firm is operating on the negatively sloped portion of its average total cost curve, where increasing output would result in decreasing average total cost. Therefore, the correct answer is D. Option A is incorrect because having excess capacity does not necessarily imply an absence of economies of scale. Option B is incorrect because the minimum efficient scale refers to the lowest level of output at which a firm can achieve the lowest long-run average cost. Option C is incorrect because diseconomies of scale occur when the firm experiences rising average total cost as output increases beyond a certain level, which is not the case here.

If a Monopolistically Competitive Firm Has Excess Capacity