Consider a Monopolist Attempting to Engage in Limit Pricing with Total

question 59

Multiple Choice

Consider a monopolist attempting to engage in limit pricing with total costs C(Q) = 200 + 10Q.The market (inverse) demand for its product is P = 150 − 2Q.Currently,the monopolist produces 40 units of output.Assuming the potential entrant has the same cost structure as the incumbent monopolist,is it profitable for the entrant to produce 20 units of output?

• A) Yes, since the market price of $30 is greater than the average total cost of producing 20 units.
• B) No, since the market price of $30 is less than the average total cost of producing 20 units.
• C) Yes, since the market price of $70 is greater than the average total cost of producing 20 units.
• D) No, since the market price of $70 is less than the average total cost of producing 20 units.

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Definitions:

Double-Declining-Balance

A method of accelerated depreciation which doubles the normal depreciation rate.

Scrap Value

An estimated calculation of what an asset will be worth at the time it is sold, after it is no longer useful.

Sum-Of-The-Years-Digits

An accelerated method of depreciation which totals the digits of an asset's useful life and allocates the cost based on a fraction of those digits.

Scrap Value

The calculated resale value of an asset at the termination of its functional life.