A monopolist earns $ 30 million annually and will maintain that level of profit indefinitely, provided that

Question:

A monopolist earns $ 30 million annually and will maintain that level of profit indefinitely, provided that no other firm enters the market. However, if another firm enters the market, the monopolist will earn $ 30 million in the current period and $ 15 million annually thereafter. The opportunity cost of funds is 10 percent, and profits in each period are realized at the beginning of each period.

a. What is the present value of the monopolist’s current and future earnings if entry occurs?

b. If the monopolist can earn $ 16 million indefinitely by limit pricing, should it do so? Explain.

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...