Asked by Jordyn Mercedes on Jun 08, 2024
Verified
(Figure: Profit Maximization in Monopolistic Competition) Use Figure: Profit Maximization in Monopolistic Competition.In panel (B) of the figure,the profit-maximizing price is P2 and the ATC curve is tangent to the new demand curve.The portion of the ATC that lies to the right of the tangency and continues down to the intersection of MC with ATC indicates:
A) that the firm is incurring an economic loss.
B) that the firm is earning an economic profit.
C) overutilization.
D) excess capacity.
Economic Loss
Occurs when total cost exceeds total revenue, not covering all explicit and implicit costs.
Economic Profit
The separation between whole income and all charges, factoring in both straightforward and subtle costs.
Excess Capacity
The situation where a firm is producing less than the maximum output due to lack of demand.
- Describe the principle of surplus capacity in monopolistically competitive market environments.
- Scrutinize the impact that distinct demand and cost scenarios have on an enterprise's pricing strategies and output determinations.
Verified Answer
SN
Sogol NoroozijamaliJun 08, 2024
Final Answer :
D
Explanation :
The portion of the ATC curve that lies to the right of the tangency point and continues down to the intersection of MC with ATC indicates excess capacity. This means the firm is not producing at its minimum ATC, which is a characteristic of monopolistic competition due to the presence of differentiated products and the lack of price competition leading to inefficiencies such as excess capacity.
Learning Objectives
- Describe the principle of surplus capacity in monopolistically competitive market environments.
- Scrutinize the impact that distinct demand and cost scenarios have on an enterprise's pricing strategies and output determinations.
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