A monopolist earns $50 million annually and will maintain that level of profit indefinitely, provided no other firm enters the market. If another firm successfully enters the market, the incumbent's profits remain at $50 million the first period, but fall to $25 million annually thereafter. The opportunity cost of funds is 10 percent, and profits in each period are realized at the beginning of each period. If the monopolist can earn $27 million indefinitely by limit pricing, should it do so?
A. No, it will earn $297 million in present value if it does this.
B. Yes, it will earn $297 million in present value if it does this.
C. No, it will earn $270 million in present value if it does this.
D. Yes, it will earn $270 million in present value if it does this.
Answer: B
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