Answer to Question 1
D
Answer to Question 2
Excess capacity refers to a situation where a firm does not produce at the lowest possible average cost. In other words, economies of scale have not been exhausted. Excess capacity is an inevitable consequence of product differentiation. Firms differentiate their products in order to appeal to consumers' varied tastes. Consumers are, therefore, better offthey have greater utilitythan they would be if companies did not differentiate their products. Consumers are willing to pay for the higher costs that result from product differentiation.
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