Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

-(Exhibit: Profit Maximization in Monopolistic Competition) In Panel (b), the profit-maximizing price is P₂ and the ATC curve is tangent to the new demand curve.The portion of the ATC that lies to the right of the tangency and continues down to the intersection of MC with ATC indicates _______ , because in the long run in _______ the price would be equal to _______.
A) unused capacity; oligopoly; MC = minimum ATC
B) excess capacity; perfect competition; MC = minimum ATC
C) under-utilization; monopoly; MR = MC
D) excess capacity; perfect competition; MC minimum ATC

Question

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition
 
-(Exhibit: Profit Maximization in Monopolistic Competition) In Panel (b), the profit-maximizing price is P₂ and the ATC curve is tangent to the new demand curve.The portion of the ATC that lies to the right of the tangency and continues down to the intersection of MC with ATC indicates _______ , because in the long run in _______ the price would be equal to _______.
A) unused capacity; oligopoly; MC = minimum ATC 
B) excess capacity; perfect competition; MC = minimum ATC 
C) under-utilization; monopoly; MR = MC 
D) excess capacity; perfect competition; MC > minimum ATC

Quizplus · Accepted Answer

The portion of the ATC curve that lies to the right of the tangency and continues down to the intersection of MC with ATC in Panel (b) indicates excess capacity because the firm is producing less than the minimum efficient scale. In the long run, in perfect competition, the price would be equal to the minimum ATC and the firm would produce at a level where MC = minimum ATC. Therefore, the correct option is B: excess capacity; perfect competition; MC = minimum ATC.

Use the Following for Questions 22-31