Answered

When a firm operates with excess capacity,

A. it must be a perfectly competitive firm.
B. additional production would lower the average total cost.
C. additional production would increase the average total cost.
D. it must be a monopolistically competitive firm.



Answer :

GinnyAnswer

Final answer:

Excess Capacity in firms leads to inefficiency due to underutilization of resources and a mismatch between price and cost in monopolistic competition.


Explanation:

Excess Capacity occurs when a firm operates below the output level where average costs are minimized, resulting in inefficiency. In monopolistic competition, firms tend to have excess capacity because they price their products above marginal cost. Expanding output would lead to lower average total cost but firms refrain due to the revenue-cost mismatch.


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