Question

Excess capacity in monopolistically competitive industries results because in equilibrium
A) each firmʹs output level is too great to minimize average cost.
B) each firmʹs output level is too small to minimize average cost.
C) firms make positive economic profit.
D) price equals marginal cost.

Answer 1

Option B is the correct answer. Excess capacity in monopolistically competitive industries results in equilibrium because each firm's output level is too small to minimize average cost.

Often, we observe an equilibrium state in competitive industries monopolistically due to excess capacity in monopoly. This is generally because each firm's output level is too small to minimize the average cost.

Excess Capacity is a characteristic of natural monopoly or related to any monopolistic competition. This condition generally arises due to increasing demand which forces the firm to invest more in order to expand in lumpy or indivisible portions.

Hence, Option B is correct.

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