Monopolistic competition tends to lead firms to have wasted capacity. Why?
What will be an ideal response?
Under monopolistic competition in the long run, the firm will tend to produce an output lower than that which minimizes its unit costs, and hence unit costs of the monopolistic competitor will be higher than necessary. Because the level of output that corresponds to minimum average cost is naturally considered to be the firm’s optimal capacity, this result has been called the excess capacity theorem of monopolistic competition.
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