In contrast with perfect competition, excess capacity characterises 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

In monopolistic competition, firms do not produce at the minimum point on their average total cost curves due to the downward-sloping demand curve they face. Instead, they produce where their demand curve is tangent to their long-run average total cost curve, which typically does not coincide with the minimum point of the average total cost curve, leading to excess capacity.

In Contrast with Perfect Competition, Excess Capacity Characterises Monopolistic Competition