Question

Monopolistically competitive firms have excess capacity. To maximize profits, firms will a. increase their output to lower their average total cost of production and eliminate the excess capacity. b. produce where price equals marginal cost to eliminate the excess capacity. c. produce where average revenue equals marginal cost to eliminate the excess capacity. d. maintain the excess capacity.

Answer 1

The correct option here is D) maintain the excess capacity.

Step-by-step explanation:

Excess capacity is a concept which tells the difference between the optimum output that a company wants to obtain and the actual output it obtains.

Under the monopolistic competition ( a market where there is imperfect competition ) , firms would want to maintain their excess capacity because here firms are not of optimum size ( even when earning profits ) , they don't have the enough incentive to make optimum output and even if they try doing , then it will cost them high marginal cost in the long run than in comparison to marginal revenue.