A monopolist earns 30 million annually and will maintain that level of profit indefinitely, provided that no other firm enters the market. However, if another firm enters the market, the? monopolist will earn $30 million in the current period and $15 million annually thereafter. The opportunity cost of funds is 10 percent and profits in each period are realized at the beginning of each period.
a. What is the present value of the monopolists current and future earnings if entry occurs?
b. If the monopolist can earn $25 million indefinitely by limit pricing, should it do so? Explain?
c. Consider the following simultaneous move game:
1. Step 1 of 2
Without any competitor, the monopolist?s annual profit ( ) will be $30 million and it will maintain that level forever.
But with the entry of a rival firm,...
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