It has been argued that because the monopolistic competitive firm faces a downward-sloping demand curve, in long run equilibrium it
A)overutilizes its plant size.
B)has excess capacity.
C)produces an output greater than the one that would minimize its costs of production.
D)always earns an economic profit.

Question

Quizplus · Accepted Answer

In long run equilibrium, a monopolistically competitive firm will have a price equal to its average total cost, but it will not produce at the minimum point of its average total cost curve due to its downward-sloping demand curve. As a result, it will have excess capacity (i.e. it will not utilize its plant size to its fullest potential). Therefore, the correct answer is B. Choices A, C, and D are incorrect statements.

It Has Been Argued That Because the Monopolistic Competitive Firm