Consider an Incumbent That Is a Monopoly Currently Earning $2

question 41

Multiple Choice

Consider an incumbent that is a monopoly currently earning $2 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 $1.2 million annually.To keep potential entrants out of the market,the incumbent lowers its price to the point where it is earning $1.6 million annually for the indefinite future.If the interest rate is 10 percent,does it make sense for the incumbent to limit price to prevent entry?

• A) No, since $4 million > $400,000.
• B) Yes, since $4 million > $400,000.
• C) No, since $2 million > $200,000.
• D) Yes, since $2 million > $200,000.

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Definitions:

Mnemonic

A memory aid, often using patterns of letters, ideas, or associations to help in remembering something.

Musical Notation

A system of symbols and marks used to represent musical sounds in written form, facilitating the composition and performance of music.

Maintenance Rehearsal

Rote repetition of material in order to maintain its availability in memory.

Prefrontal Cortex

The part of the brain located at the front of the frontal lobe, associated with complex cognitive behavior, personality expression, decision making, and moderating social behavior.