When a firm operates with excess capacity,
A)additional production would lower the average total cost.
B)additional production would increase the average total cost.
C)it must be a perfectly competitive firm.
D)it must be a monopolistically competitive firm.

Question

Quizplus · Accepted Answer

When a firm operates with excess capacity, it means that it is not producing at its maximum potential. Therefore, additional production can be achieved without incurring higher fixed costs. This will lead to a decrease in the average total cost as the fixed cost is spread over a larger output, resulting in economies of scale.

When a Firm Operates with Excess Capacity