Which of the following best describes the idea of excess capacity in monopolistic competition?
A)Firms produce more output than is socially desirable.
B)The output produced by a typical firm is less than what would occur at the minimum point on its ATC curve.
C)Due to product differentiation, firms choose output levels where price equals average total cost.
D)Firms keep some surplus output on hand in case there is a shift in the demand for their product.

Question

Quizplus · Accepted Answer

Excess capacity refers to the difference between the output produced by a firm and the output that would occur at the minimum point on its average total cost (ATC) curve. In monopolistic competition, firms have some degree of market power due to their product differentiation, which allows them to charge higher prices than a perfectly competitive market. However, they still face some competition and cannot charge a price that exceeds their average total cost. Therefore, they choose an output level where price equals average total cost, which results in excess capacity.

Which of the Following Best Describes the Idea of Excess