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. Yes, since $2 million > $200,000.
B. Yes, since $4 million > $400,000.
C. No, since $4 million > $400,000.
D. No, since $2 million > $200,000.
Answer: B
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