Question

The firms under imperfect competition operates with ____________.

• A. Less capacity
• B. Excess capacity
• C. Normal capacity
• D. Either (A) or (B)

Answer 1

The correct option is B Excess capacity

Monopolistically competitive firms operate with excess capacity because the zero-profit tangency equilibrium occurs along the downward-sloping part of a firm's short-run average cost curve, so the firm's plant has the capacity to produce more output at lower average cost than it is actually producing.