Final answer:
The student's question is about a monopolist's additional profit from a cost-saving innovation that reduces marginal cost from $40 (MC1) to $10 (MC2). The monopolist's incentive or additional profit is the difference in profit margins before and after the cost reduction, assuming other factors remain constant.
Step-by-step explanation:
The question pertains to a monopolist's decision-making process concerning price and quantity, focusing on how a reduction in marginal cost affects profit. Initially, with a marginal cost (MC1) of $40, the monopolist determines the profit-maximizing quantity where marginal revenue (MR) equals marginal cost. The monopolist would then set the highest price the market is willing to pay, which is indicated on the demand curve. If the monopolist reduces the marginal cost to MC2 of $10 through process innovation, the incentive, or additional profit, can be calculated. The additional profit is the difference between the total revenues and total costs before and after the cost reduction. This profit is visually represented as the area of the rectangle with a base equal to the monopoly quantity and a height equal to the difference between price and the new average cost.
In other words, the innovation increases the monopolist’s profit by reducing the cost of producing each unit, assuming the quantity produced and sold remains unchanged and the price remains at the profit-maximizing level. The innovation creates an extra profit margin between the lower cost of production and the existing price, adding to the firm's profits.