Monopolistically competitive firms have downward-sloping demand curves.In the long run, monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run
A)monopolistically competitive markets achieve productive efficiency.
B)monopolistically competitive markets achieve allocative efficiency.
C)monopolistically competitive firms earn economic profits.
D)monopolistically competitive firms have excess capacity.

Question

Quizplus · Accepted Answer

Monopolistically competitive firms have excess capacity in the long run because they produce at a quantity lower than the one that would minimize their average total cost. This is due to the downward-sloping demand curve, which makes them have a markup over their marginal cost, similar to a monopoly. However, unlike a monopoly, monopolistically competitive firms face competition from other firms producing close substitutes, which erodes their ability to earn economic profits in the long run. As a result, they operate with excess capacity in the long run, which implies that they could produce more and increase their profits, but they don't because they face insufficient demand for their products at higher prices.

Monopolistically Competitive Firms Have Downward-Sloping Demand Curves