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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

A monopolistically competitive firm in long-run equilibrium typically produces at an output level that is below the minimum point of its average cost curve. This situation is called:

The situation is called excess capacity. In long-run equilibrium the firm's downward sloping demand curve touches the average cost curve on its falling portion, so output is less than the level that minimises average cost, leaving the firm's plant underused.

  1. AExcess capacityCorrect
  2. BPrice discrimination
  3. CDumping
  4. DNatural monopoly

Explanation

Because the demand curve is downward sloping and tangent to the falling part of the average cost curve, output is less than the cost-minimising output. The gap is termed excess capacity. It is not price discrimination or dumping, and a natural monopoly relates to a single seller.

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