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:

Marginal Cost

The increase or decrease in total production cost when producing one additional unit of a good.

Average Cost

The total cost of production divided by the quantity of output produced, also known as the cost per unit.

Marginal Cost

The escalation in aggregate cost that comes from generating one more unit of a product or service.

Fixed Cost

Costs that do not change with the amount of goods or services produced by a business.