Monopolistic competition is characterized by excess capacity because
A) firms are always profitable in the long run.
B) firms charge a price that is greater than marginal cost.
C) firms produce at an output level less than the least-cost output.
D) the demand for the product is perfectly elastic in this type of industry.

Question

Quizplus · Accepted Answer

Monopolistic competition is characterized by differentiated products that are not perfect substitutes, allowing firms to have some degree of market power. However, due to the presence of many firms with similar products, there is intense competition, which leads to firms having excess capacity. Excess capacity occurs when firms produce at an output level less than the least-cost output, which is the output level where the average total cost is minimized. This results in higher production costs and lower profits for the firm in the long run. Therefore, the correct answer is C.

Monopolistic Competition Is Characterized by Excess Capacity Because