Use a Graph to Demonstrate Why a Profit-Maximising Monopolistically Competitive

question 166

Essay

Use a graph to demonstrate why a profit-maximising monopolistically competitive firm must operate at excess capacity.Explain why a perfectly competitive firm is not subject to the same constraint.

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Definitions:

Spillover Benefit

A positive effect experienced by bystanders or other parties not directly involved in the production or consumption of a good or service.

External Costs

Costs incurred by a third party as a result of an economic transaction that are not reflected in the transaction's price.

Product Differentiation

A strategy in which one firm’s product is distinguished from competing products by means of its design, related services, quality, location, or other attributes (except price).

Economic Profits

Economic Profits represent the excess returns a firm makes above its opportunity costs, accounting for both explicit and implicit costs.