In a competitive market, how can it be beneficial for a firm to be the first to innovate?

• A. The firm will always maintain its market dominance without any threat from new entrants.
• B. The firm is guaranteed government subsidies for being the first to innovate.
• C. The firm can avoid all production costs by being the first to innovate.
• D. The firm can gain a temporary monopoly and earn economic profits before competitors catch up.

Answer: (D)

Verified step by step guidance

1. Understand the concept of innovation in a competitive market: Innovation refers to the introduction of new products, processes, or technologies that can give a firm a competitive edge.
2. Recognize that being the first to innovate can provide a firm with a temporary monopoly because it offers a unique product or process that competitors have not yet developed or adopted.
3. Analyze how this temporary monopoly allows the firm to earn economic profits, which are profits above the normal competitive level, since there is no immediate competition for the innovative product or process.
4. Consider that these economic profits are temporary because, over time, other firms will likely imitate or improve upon the innovation, eroding the first mover's advantage.
5. Conclude that the benefit of being first to innovate lies in the ability to capitalize on a temporary period of reduced competition and higher profits before competitors catch up.