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Figure: Profit Maximization for a Firm in Monopolistic Competition
-(Figure: Profit Maximization for a Firm in Monopolistic Competition)Use Figure: Profit Maximization for a Firm in Monopolistic Competition.Suppose that an innovation reduces a firm's costs from ATC to ATC'.After the innovation reduces the cost,the firm's economic profit at the new profit-maximizing quantity is:
A)$0.
B)$30.
C)$1,500.
D)$3,000.

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Use the following to answer question:
Figure: Profit Maximization for a Firm in Monopolistic Competition 
-(Figure: Profit Maximization for a Firm in Monopolistic Competition)Use Figure: Profit Maximization for a Firm in Monopolistic Competition.Suppose that an innovation reduces a firm's costs from ATC to ATC'.After the innovation reduces the cost,the firm's economic profit at the new profit-maximizing quantity is:
A)$0. 
B)$30. 
C)$1,500. 
D)$3,000.

Quizplus · Accepted Answer

The innovation shifts the average total cost curve down to ATCF1F1F1S1F1F1F10. The firm will choose a new profit-maximizing quantity where marginal revenue equals marginal cost, which occurs at output level Q1Q1Q1S1. At this level of output, the firm's price is P1P1P1S1, which is higher than its average total cost (ATC) of producing that quantity. The firm's economic profit will be the difference between its total revenue (P1P1P1S1 multiplied by Q1Q1Q1S1) and its total cost at the new average total cost curve (ATCF1F1F1S1F1F1F10 multiplied by Q1Q1Q1S1). This equals ($30- $24) multiplied by 100 = $1,500. Therefore, the correct answer is option C.

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