In the long run, the representative firm in monopolistic competition tends to have
A) excess capacity.
B) economic profits.
C) no product differentiation.
D) a perfectly elastic demand curve.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms engage in product differentiation to create a somewhat unique product to attract customers, which creates monopolistic power. As a result, firms face a downward-sloping demand curve, but not perfectly elastic. This leads to excess capacity, as the firm produces at a lower output than the one that would minimize its average total cost (ATC) in order to create a perceived differentiation between their goods and their competitors. This, in turn, leads to higher costs and lower efficiency, thus resulting in lower economic profits.

In the Long Run, the Representative Firm in Monopolistic Competition