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IAI Actuarial Core Principles · Business Economics · Profit maximisation under imperfect competition

In long-run equilibrium, a monopolistically competitive firm produces at an output where average cost is still falling. What is this result usually called?

The result is called excess capacity. In long-run equilibrium, the firm's downward-sloping demand curve touches average cost on its falling section, so output is below the cost-minimising scale. The firm could lower average cost by producing more, but it does not.

  1. AExcess capacityCorrect
  2. BAllocative efficiency
  3. CProductive efficiency
  4. DNatural monopoly
  5. Price discrimination

Explanation

Tangency of the downward-sloping demand curve with AC occurs on the falling part of AC, so output is below the level at minimum AC. The gap is excess capacity. Price also exceeds marginal cost, so allocative efficiency is not achieved.

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