Excess capacity occurs in long-run equilibrium under monopolistic competition so that:
A) price is less than marginal cost.
B) price exceeds minimum average cost.
C) marginal revenue exceeds price.
D) all of the above occur.

Question

Quizplus · Accepted Answer

In long-run equilibrium under monopolistic competition, firms will produce where price equals minimum average cost (but still above marginal cost). This leads to excess capacity because they are not producing at full capacity, meaning that they could produce more and reduce average costs. As a result, price exceeds minimum average cost. Therefore, only option (B) is correct. Option (A) is incorrect because in monopolistic competition price is generally greater than marginal cost, not less. Option (C) is incorrect because marginal revenue will always be less than price in monopolistic competition.

Excess Capacity Occurs in Long-Run Equilibrium Under Monopolistic Competition So