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

Question

Quizplus · Accepted Answer

In monopolistic competition, each firm has some degree of market power, allowing them to charge a price above their marginal cost, which creates excess capacity. This means that firms produce at an output level less than the least-cost output, leading to less efficient use of resources.

Monopolistic Competition Is Characterized by Excess Capacity Because