A monopolistically competitive firm is considered to have excess capacity because it:
A)does not operate at the minimum point on its long-run average cost curve.
B)does not operate at the minimum point on its marginal cost curve.
C)operates at the point where average cost is greater than average revenue.
D)operates at the point where marginal cost is above average revenue.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power but face competition from other firms selling similar products. Due to this competition, firms cannot charge prices significantly above their costs without losing customers. As a result, firms in monopolistic competition typically operate with excess capacity, meaning they produce less than what they could technically produce given their resources and technology. This is because producing at full capacity would mean operating at a point on the long-run average cost curve where the firm's average costs are higher than necessary due to fixed costs being spread out over fewer units. Therefore, the firm operates at a lower output level where its average costs are lower, even though it could produce more.

A Monopolistically Competitive Firm Is Considered to Have Excess Capacity