The excess capacity theorem holds for a (n)__________, and states that in the long run the firm produces an output __________.
A)perfectly competitive firm; that is resource-allocative efficient
B)monopoly firm; that is not resource-allocative efficient
C)monopolistic competitor; smaller than the one that would minimize its costs of production
D)oligopoly firm; larger than the one that would minimize its costs of production

Question

Quizplus · Accepted Answer

The excess capacity theorem holds for monopolistic competition firms, which have a degree of market power but still face competition. The theorem suggests that firms in this market structure will produce at a smaller scale than the one that would minimize their costs of production in the long run due to their desire to differentiate their products and maintain market power. Therefore, the output produced will be smaller than the efficient output level.

The Excess Capacity Theorem Holds for a (N)__________, and States