Question $2(12$ marks$)$

$($a$)$ 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 $$30$ million in the current period and $$12$ million annually thereafter.

Assume the interest rate is $5$ percent.

$($a$)($i$)$ What is the present value of the monopolist's current and future earnings if entry

occurs?

$($a$)($ii$)$ If the monopolist charge below the monopoly price in order to keep potential

entrants out of the market, she can earn $$16$ million indefinitely, should this pricing

strategy to be adopted? Explain.

$($b$)$ Draw a diagram to illustrate the learning curve effects. Besides the learning curve effects,

name two other sources of first$-$mover advantages.