In the long run, a firm operating under Monopolistic

Solution

In the long run, a monopolistically competitive firm reaches equilibrium where its Demand curve (which is downward-sloping due to product differentiation) is tangent to its Long-Run Average Cost (LAC) curve. Because the demand curve has a negative slope, this tangency must occur on the downward-sloping portion of the LAC curve, to the left of its minimum point. This gap between the actual output produced and the output level that would minimize average costs is known as Excess Capacity.    Note - Because Price> Marginal cost at equilibrium, Monopolistic Competition is considered allocatively inefficient compared to Perfect Competition.