- 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?
- 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.
- 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
