The Excess- Capacity Theorem Predicts

question 86

Multiple Choice

The excess- capacity theorem predicts

• A) that when price- taking firms maximize their profits by setting price equal to marginal cost, each firm operates with some excess capacity.
• B) that long- run equilibrium in a monopolistically competitive industry occurs with all firms producing at a lower output level than that which minimizes average total costs.
• C) that profit- maximizing firms will always choose to operate with some degree of excess capacity, in order to be flexible in the face of shifts in demand.
• D) that all firms in a perfectly competitive industry will produce at a lower output level than that which minimizes average total costs.
• E) that monopolistic firms will achieve positive economic profits by restricting output below the economically efficient level at which average total costs are minimized.

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Definitions:

8% Bond

A bond that pays an annual interest rate of 8% of its face value to the bondholders.

Yield To Maturity

The total return anticipated on a bond if it is held until the date it matures, taking into account both current interest payments and the gain or loss upon redemption.

7% Bond

A bond that pays 7% interest annually on its face value.

Current Yield

A financial ratio that shows the annual dividend rate of a security divided by its current market price.