Question

Monopolistic competition is characterized by excess capacity because: firms are always profitable in the long run firms charge a price that is greater than marginal cost firms produce at an output level less than the least-cost output the demand for a product is perfectly elastic in this type of industry

Answer 1

Demand for a product is perfectly elastic in this type of industry. Monopolistic competition occurs whereby the market is made up of many consumers and many producers and the product/service offered by the producers is differentiated. In this case, the producers are price makers as they posses significant pricing power. One key characteristic across the board is that since a similar range of products is being offered, demand is highly elastic and can easily shift based on small changes made by the producer.