Question

Assume a firm is a monopoly and enjoys​ $10 million 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 the firm be willing to pay to deter​ entry? A. ​$250 million. B. ​$100 million. C. ​$250 billion. D. ​$25 million.

Answer 1

Answer: A. $250 million

Explanation:

The firm is a Monopoly and is lobbying Congress to remain that way. As a monopoly it makes $10 million a year and wants to remain a monopoly for the next 25 years.

Assuming there is no discount rate which means that the value of money stays the same over the 25 years, if they succeed in Congress, they have a chance to make a total profit of,

= 10 million * 25 years

= $250 million

If the maximum amount the firm can make if the lobbying is successful is $250 million, this is the maximum they will pay to lobby for a deterrence to entry. If they pay any amount more than $250 million, they will be making a loss and therefore it would make no sense to spend that amount of the lobbying.