Why firms in monopolistic competition must have excess capacity

  1. Explain fully why firms in monopolistic competition must have excess capacity when they are in long-run equilibrium. Explain why this excess capacity increases price by only a small amount. Why are consumers willing to pay this slightly higher price?
  2. Explain fully why perfectly competitive and monopolistically competitive firms must earn only normal profits in long-run equilibrium but monopolies can earn either normal profits or economic profits in long-run equilibrium.
  3. Explain fully the difference between consumer surplus and producer surplus. Explain why a single consumer can get consumer surplus. Explain why a single producer can get producer surplus.

Sample Solution

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