In the long run, a firm in a perfectly competitive market operates
A)at its efficient scale, and a monopolistically competitive firm operates at its efficient scale.
B)at its efficient scale, and a monopolistically competitive firm operates with excess capacity.
C)with excess capacity, and a monopolistically competitive firm operates with excess capacity.
D)with excess capacity, and a monopolistically competitive firm operates at its efficient scale.

Question

Quizplus · Accepted Answer

In the long run, a firm in a perfectly competitive market operates at its efficient scale, where it produces at the minimum average total cost. On the other hand, a monopolistically competitive firm operates with excess capacity, where it produces at a quantity lower than the one that minimizes its average total cost. This is because a monopolistically competitive firm faces downward-sloping demand for its differentiated product, and it must reduce its output to maintain a price that is above its marginal cost. Therefore, choice B is the correct answer.

In the Long Run, a Firm in a Perfectly Competitive