The correct answer is C. Excess capacity may or may not exist in imperfect competition.
In perfect competition, firms produce at the point where marginal cost equals marginal revenue. This is the point of minimum average cost, and it is also the point where firms are producing at their efficient level. However, in imperfect competition, firms have market power, which means that they can charge a price above marginal cost. This means that firms may not produce at the point of minimum average cost, and they may also have excess capacity.
Excess capacity is the difference between the firm’s actual output and the output that it would produce if it were producing at the point of minimum average cost. Excess capacity can occur for a number of reasons. For example, firms may have excess capacity if they are trying to deter entry into the market. They may also have excess capacity if they are trying to maintain a high level of quality or if they are facing uncertainty about future demand.
Whether or not excess capacity exists in imperfect competition depends on a number of factors, including the number of firms in the market, the degree of product differentiation, and the cost structure of the firms. In general, we would expect to see more excess capacity in markets with a small number of firms, high product differentiation, and high fixed costs.
Here is a brief explanation of each option:
- Option A: Excess capacity always exists. This is not always the case. As explained above, excess capacity can occur for a number of reasons, but it does not always exist.
- Option B: Excess capacity never exists. This is also not always the case. As explained above, excess capacity can occur for a number of reasons, so it is not always the case that excess capacity never exists.
- Option C: Excess capacity may or may not exist. This is the correct answer. As explained above, excess capacity can occur for a number of reasons, so it is not always the case that excess capacity exists or does not exist.
- Option D: None of the above. This is not the correct answer. As explained above, excess capacity can occur for a number of reasons, so it is not always the case that excess capacity exists or does not exist.