In the long run,the representative firm in monopolistic competition tends to have:
A) excess capacity.
B) economic profits.
C) limited product differentiation.
D) a perfectly elastic demand curve.

Question

Quizplus · Accepted Answer

In the long run, firms in monopolistic competition tend to have excess capacity because they produce at a quantity that is less than the level of production that would minimize their average cost. This is because firms in monopolistic competition differentiate their products, resulting in a downward sloping demand curve. Therefore, they cannot produce at the minimum efficient scale as they have to maintain the uniqueness of their product. As a result, they tend to have excess capacity, which can lead to higher average costs and lower profits. Economic profits may not be achieved in the long run due to the entry of new firms attracted by the high profits initially earned by incumbent firms. Limited product differentiation is a characteristic of perfect competition, not monopolistic competition. A perfectly elastic demand curve is also not a feature of monopolistic competition as firms face a downward sloping demand curve.

In the Long Run,the Representative Firm in Monopolistic Competition Tends