Because of one assumption in the theory of monopolistic competition, the excess capacity theorem exists. What is the assumption?
A)There are many sellers and buyers.
B)Each firm produces and sells a slightly differentiated product.
C)There is easy entry into the industry.
D)There is easy exit from the industry.

Question

Quizplus · Accepted Answer

The excess capacity theorem in the theory of monopolistic competition is primarily due to the assumption that each firm produces and sells a slightly differentiated product. This differentiation leads to firms having some degree of market power, allowing them to set prices above marginal cost, which in turn results in excess capacity.

Because of One Assumption in the Theory of Monopolistic Competition