Consider an Incumbent That Is a Monopoly Currently Earning $2

Multiple Choice

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