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A firm in long-run equilibrium under monopolistic competition operates with excess capacity. This means it:
AProduces exactly at the minimum of its average cost curve
BProduces less than the output at minimum average cost
CProduces more than the least-cost level of output
DEarns supernormal profit by overusing its plant
Answer & Solution
Correct answer: B. Produces less than the output at minimum average cost
1. Long-run equilibrium occurs where AR is tangent to the AC curve.
2. This tangency lies on the falling portion of the AC curve, left of its minimum.
3. So output is below the least-cost (full capacity) level.
4. The gap between this output and the minimum-cost output is the excess capacity.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit III "Price-Output Determination under Different Market Forms", p.23_
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