Quiz: Ch13 HW This Question: 1 pt 13 of 14 (13 co Suppose the figure to the righ

Question

  
Quiz: Ch13 HW This Question: 1 pt 13 of 14 (13 co Suppose the figure to the right represents the market for a particular brand of shampoo, such as L'Oreal, Lancome, or Maybelline. he market is monopolistically competitive and is in long-run equilibrium. How much excess capacity does the firm have? The monopolistically competitive firm's excess capacity is 4 thousand bottles of shampoo. (Enter your response as an integer) Instead, suppose the market is perfectly competitive and is in long-run equilibrium (with the same cost structure as that illustrated in the figure.) How much excess capacity does the firm have? The perfectly competitive firm's excess capacity is thousand bottles of shampoo.

Explanation / Answer

The monopolistically competitive firm, in the long run, produces output at a level which is less than the socially optimum output. The difference between long run output produced by the firm and the socially optimum quantity is called excess capacity.

So in the graph, the firm produces an output of 7 thousand bottles. But the socially optimum quantity is 11 thousand bottles.

1. The monopolistically competitive firm's excess capacity is 4 thousand bottles of shampoo.

In the perfectly competitive market, the firm will have 0 excess capacity. This is because even the cost structure is same but now marginal revenue curve (MR) will be straight line touching the point where Marginal Cost curve and average total cost curve intersect. So the perfectly competitive firm will produce 11 thousand bottles of shampoo with 0 excess capacity.

2. The perfectly competitive firm's excess capacity is 0 thousand bottles of shampoo.

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