Since a monopolistically competitive firm faces a ____ demand curve,it will always operate ____ in long-run equilibrium.
A) perfectly elastic; with excess capacity
B) downward-sloping; with excess capacity
C) downward-sloping; at an economically efficient scale
D) perfectly inelastic; at an economically efficient scale

Question

Quizplus · Accepted Answer

Monopolistically competitive firms have downward-sloping demand curves because they have some control over the price of their differentiated product. In the long run, firms in monopolistic competition will operate with excess capacity because they will not produce at their minimum efficient scale due to the lack of economies of scale. However, they will not operate at an economically efficient scale because they will not produce where marginal cost equals marginal revenue like perfectly competitive firms do. Instead, they will set a price markup above marginal cost to capture some monopoly power, leading to higher prices and lower output than in perfect competition. This results in a less efficient outcome than perfect competition but more variety and product differentiation for consumers.

Since a Monopolistically Competitive Firm Faces a ____ Demand Curve,it