Explain why firms in monopolistic competition have excess capacity in the long run

What will be an ideal response?

A firm's efficient scale of production is the level of production where average total cost is at a minimum. In the long run, monopolistically competitive firms do not produce where ATC is at the minimum. They would need to increase output to reach this point. But if they did so, their profit would decrease. So for firms in monopolistic competition, the profit-maximizing output is less than the efficient scale.