Assume a firm is a monopoly and enjoys $10,000,000 profits per year.The firm lobbies to have a moratorium passed by Congress on new firms in its market for the next 25 years.If there is no discount rate,how much would any firm(s)arguing against the moratorium be willing to spend to block it?
A) something less than $250 million
B) $250 million
C) $251 million
D) $250 billion

Question

Quizplus · Accepted Answer

If a moratorium is passed on new firms in the market, the existing monopoly firm will continue to earn a profit of $10,000,000 per year for the next 25 years without any competition. Any potential competitor will be blocked from entering the market, resulting in a loss of profits for that firm. Therefore, a potential competitor would be willing to spend an amount less than $250 million to block the moratorium, as this is the present value of the monopoly profits for 25 years (assuming no discount rate). Spending more than $250 million would not be rational, as the potential profits from entering the market would be less than the cost of blocking the moratorium. Thus, option A is correct.

Assume a Firm Is a Monopoly and Enjoys $10,000,000 Profits