Which of the following statements is correct?
A)In the long run, both perfectly competitive firms and monopolistically competitive firms operate with excess capacity.
B)A firm operates with excess capacity when, in the long run, its level of output is below the efficient scale.
C)For any firm, efficient scale is the level of output at which the average-total-cost curve is tangent to the demand curve.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

Excess capacity refers to a situation in which a firm produces below its efficient scale. In the long run, perfectly competitive firms operate at their efficient scale, while monopolistically competitive firms operate with excess capacity. Therefore, option A is incorrect. Option C is also incorrect because the efficient scale is the level of output at which the average total cost curve intersects the marginal cost curve, not the demand curve. Only option B correctly defines excess capacity, making it the correct answer.

Which of the Following Statements Is Correct