Question

Cliff's Candy produces and sells boxes of chocolates. When Cliff produces and sells his profit-maximizing quantity of 1,000 boxes, the average total cost is $3.00. If Cliff were to produce 1,100 boxes, the average total cost would be $2.50. Which of the following inefficiencies of monopolistically competitive markets is described in this scenario?
a. Product-variety externality
b. Business-stealing externality
c. Markup over marginal cost
d. Excess capacity

Answer 1

Answer:

D

Explanation:

A monopolistic competition is when there are many firms selling differentiated products in an industry. A monopolistic competition has characteristics of both a monopoly and a perfect competition. the demand curve is downward sloping. it sets the price for its goods and services.

An example of monopolistic competition are restaurants  

The product-variety externality: When new firms enter into an industry, competition drives price down. This increases consumer surplus. As a result, entry of firms into an industry results in a positive externality on consumers.

The business-stealing externality: When a new firm enters into an industry, existing firms lose customers and profits fall. As a result,  entry of a new firm results in a negative externality on existing firms.

Markup over marginal cost is the extent of which price exceeds marginal cost

Excess capacity is when a firm is producing at a capacity that is less than what it is designed for. Excess capacity is evidenced when upon increasing output, average cost falls.