CIMA BA1 · Chapter 7 · Question 10 of 11
In long-run equilibrium under monopolistic competition, a typical firm:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Earns normal profit and operates with excess capacity
Explanation
Free entry removes supernormal profit, so in the long run the demand curve is tangential to the average cost curve. Because the demand curve slopes downwards (differentiated products), the tangency is to the left of minimum average cost, so firms have excess capacity.
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