Question

Support or refute the following statement: “Excess capacity is not a necessary condition on Monopolistic Competition.”

Answer 1

Answer : Excess capacity is a necessary condition for Monopolistic competition in long run . In order to produce in long run Equilibrium there is condition that production should be run at the level where the average total cost is minimum , so the firm plant has capacity to produce more output at lower average cost than it's actually producing level of output. The firm in order to earn Economic profit in long run always produce at minimum of ATC which means production has over capacity.