A monopolist makes $20 million a year and will keep this profit level given that no other firm enters the market. However, the entry of another firm will reduce the monopolist’s profits to $10 million a year. The interest rate is 5 percent and profits are realized at the beginning of each period.

2.1 Assume that another firm enters the market, what is the present value of the monopolist’s current and future profits?

2.2 Assume that by using limiting pricing the monopolist makes $12 million indefinitely. Should the monopoly adopt this strategy?