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Figure: Profit Maximization for a Firm in Monopolistic Competition
-(Figure: Profit Maximization for a Firm in Monopolistic Competition) Look at the figure Profit Maximization for a Firm in Monopolistic Competition. Suppose that an innovation reduces a firm's costs from ATC to ATC'. Before the innovation reduced the cost, the firm's maximum economic profit was:
A) $0.
B) $30.
C) $750.
D) $4,500.

Question

Use the following to answer questions:
Figure: Profit Maximization for a Firm in Monopolistic Competition 
-(Figure: Profit Maximization for a Firm in Monopolistic Competition) Look at the figure Profit Maximization for a Firm in Monopolistic Competition. Suppose that an innovation reduces a firm's costs from ATC to ATC'. Before the innovation reduced the cost, the firm's maximum economic profit was:
A) $0. 
B) $30. 
C) $750. 
D) $4,500.

Quizplus · Accepted Answer

In monopolistic competition, firms earn zero economic profit in the long run due to free entry and exit of firms. Hence, before the innovation, the firm's maximum economic profit was $0.

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