Consider an Incumbent That Is a Monopoly Currently Earning $1

question 70

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 point where it is earning $850,000 annually for the indefinite future.If the interest 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:

Superior-Quality

Refers to products, services, or materials that surpass standard quality measures in terms of performance, durability, and reliability.

Tying Agreements

Business practices where the sale of one product or service is conditioned on the purchase of another, potentially anticompetitive product or service.

Sherman Act

A landmark federal statute in the antitrust law of the United States, aimed at preserving fair competition by prohibiting monopolies and other practices that restrained trade.

Clayton Act

The Clayton Act is United States antitrust law enacted in 1914, aimed at promoting fair competition and preventing monopolies, anti-competitive mergers, and unethical business practices.