Managers can identify excess capacity by measuring the gap between:

• A. average total cost and marginal cost
• B. fixed costs and variable costs
• C. actual output and potential output on the production possibilities frontier
• D. market price and equilibrium price

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of excess capacity. Excess capacity occurs when a firm produces less than the output level that minimizes average total cost, meaning it is not fully utilizing its resources efficiently.
2. Step 2: Recognize that average total cost (ATC) and marginal cost (MC) relate to cost structures, but the gap between them does not directly measure excess capacity. Instead, they help determine the cost efficiency at different output levels.
3. Step 3: Fixed costs and variable costs describe cost components, but their difference does not indicate excess capacity. Fixed costs remain constant regardless of output, while variable costs change with output.
4. Step 4: The production possibilities frontier (PPF) represents the maximum potential output an economy or firm can achieve with given resources and technology. The gap between actual output and potential output on the PPF shows how much capacity is unused.
5. Step 5: Market price and equilibrium price relate to market conditions and do not measure excess capacity within a firm. Therefore, the correct way to identify excess capacity is by comparing actual output to potential output on the production possibilities frontier.