Consider an Incumbent That Is a Monopoly Currently Earning $1

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.