Consider an Incumbent That Successfully Links the Pre-Entry Price and Post-Entry

question 79

Multiple Choice

Consider an incumbent that successfully links the pre-entry price and post-entry profit to prevent entry.The incumbent's monopoly profit is $10 million.If a rival successfully enters the market,the incumbent's profits will fall to $4 million.If the incumbent lowers output to 25,000 units,its rival will stay out of the market,resulting in an infinite stream of profits of $8 million annually.Due to a recent loan default,the current interest rate is whopping 210 percent.Is limit pricing profitable for the incumbent?

• A) Yes, since $19.05 million is greater than $2 million.
• B) No, since $1.905 million is less than $2 million.
• C) No since $4 million is less than $4.2 million.
• D) Linking the pre-entry price to the post-entry profit is sufficient to guarantee the profitability of limit pricing.

---

Definitions:

Overgrazing

the depletion of vegetation due to continuous feeding by an excessive number of grazers.

Agricultural Revolution

A period of significant technological, social, and economic changes in agriculture, leading to increased production and efficiency.

Desert

A barren area of landscape where little precipitation occurs, thus supporting only sparse vegetation and a limited range of animals due to harsh living conditions.

Information-Globalization Revolution

A period marked by the rapid spread of information technologies and the global integration of economies, cultures, and politics.