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, themonopolist 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 $16 million indefinitely by limit pricing, should it do so?