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A Monopolistically competitive firm does have excess capacity because its demand curve is downward sloping.
Economists have recognized four types of markets. Monopolistic competition, perfect competition, oligopoly, and monopoly. Each has special qualities.
The benefits of monopolistic competition include a large number of businesses producing a distinctive good with no restrictions on entry into the market.
Because in the long term, D., the ATC of a monopolistically competitive firm is more than its minimum ATC, it has excess capacity.
A firm's capacity is maximized at the lowest Average Total Cost (ATC). If it has extra capacity, it can further reduce its cost. The Monopolistic Competition Market (MC) Equilibrium is located above the ATC minima in the graph below.
As a result, at equilibrium, the business in MC has excess capacity.
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