Answer to Question #307972 in Microeconomics for lydia

Question

Draw on a graph and explain in words the excess capacity and markup in monopolistic competition versus perfect competition. Show the deadweight loss and mark on the graph.

Answer 1

Excess capacity is more defined under monopolistic competition due to the nature of the market structure.

Unlike perfectly competitive markets where the demand curve is horizontal, monopolistic competitive markets show a downward sloping demand curve. The demand curve cannot be tangential to the LAC at its minimum point.

Conditions of equilibrium are reached at E, where LMC = LAC at the minimum point of the latter. Firms in monopolistic competition are likely to see excess capacity, as there is no incentive to produce optimum output at a higher long-run marginal cost (LMC) that is greater than marginal revenue (MR).

This can be shown below;