What happens to prices when excess capacity is present in a monopoly?

1 Answer
Sep 17, 2015

Answer:

In the long run, price is higher than the competitive market price and less than its own short run monopoly price.

Explanation:

In perfect competition a firm is operating at the minimum point of the AC curve. But under imperfect competition firm will work to the left of the minimum point of the AC curve. Hence there is excess capacity in a monopoly firm. The price will be higher than the competitive market price when there exists excess capacity with the firm. Again given the demand conditions, the firm's long run monopoly price will be less than the short run monopoly price. But both the prices will be higher than competitive price.