Smyth Industries operated as a monopolist for the past several years,earning annual profits amounting to $50 million,which it could have maintained if Jones Incorporated did not enter the market.The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually.The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit).One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year.The estimated impact of such a move is a loss of $1 billion.Ignoring antitrust concerns,compute the present value of Smyth Industries' profits,if it could have remained a monopoly when the interest rate was 5 percent.
A) $100 million
B) $200 million
C) $210 million
D) $1.05 billion

Question

Quizplus · Accepted Answer

The present value of Smyth Industries' profits as a monopoly, ignoring the $1 billion loss from the pricing strategy and antitrust concerns, is calculated using the formula for the present value of a perpetuity: PV = P / r, where P is the annual profit ($50 million) and r is the interest rate (5% or 0.05). Thus, PV = $50 million / 0.05 = $1 billion. However, since the question asks for the present value "if it could have remained a monopoly," we do not subtract the $1 billion loss from the pricing strategy, leading to a present value of $1 billion, which is not explicitly listed but closest to option D, $1.05 billion, due to rounding or a possible misunderstanding in the question's phrasing.

Smyth Industries Operated as a Monopolist for the Past Several