Excess capacity is a problem in monopolistic competition because,if there were fewer firms in the industry:

A) there would be more choices for consumers.
B) average total costs would be higher and profits would be lower.
C) average total costs would be lower and the prices paid by consumers could be lower.
D) there would be less need for government regulation.

In monopolistic competition, firms have some degree of control over their prices and produce differentiated products. Excess capacity occurs when firms have the ability to produce more output than is necessary to serve the market demand. This leads to higher average total costs, lower profits, and higher prices for consumers due to the underutilization of resources. If there were fewer firms in the industry, competition would be reduced and firms could better utilize their resources, leading to lower average total costs. This would allow them to charge lower prices to consumers while still making a profit, ultimately benefiting both consumers and firms. Thus, the correct answer is C.