Consider an Incumbent That Is a Monopoly Currently Earning $1

question 49

Multiple Choice

Consider an incumbent that is a monopoly currently earning $1 million annually.Given the declining costs of raw materials, the incumbent believes a new firm may enter the market.If successful, a new entrant would reduce the incumbent's profits to $750,000 annually.To keep potential entrants out of the market, the incumbent lowers its price to the out where it is earning $850,000 annually for the indefinite future.If the interested rate is 5 percent, does it make sense for the incumbent to limit price to prevent entry?

• A)No, since $2 million > $250,000.
• B)Yes, since $2 million > $250,000.
• C)No, since $5 million > $100,000.
• D)Yes, since $250,000 > $5 million.

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Definitions:

Alpha Waves

Brain rhythms detectable by EEG, typically associated with relaxed, wakeful states, and indicating a lack of arousal in most individuals.

EEGs

Short for electroencephalograms, these are tests that measure the electrical activity of the brain and are used to diagnose and monitor neurological disorders.

REM Sleep

A sleep stage characterized by rapid eye movement, increased brain activity, and vivid dreams.

K-Complexes

Brain waves that occur during stage 2 of NREM sleep, characterized by a sudden increase in wave amplitude, and thought to aid in sleep-based memory consolidation and sleep quality.