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A monopolist observes that a potential rival is poised to enter the market

Economics

A monopolist observes that a potential rival is poised to enter the market. The monopolist can invest in an expensive piece of equipment that will significantly lower its marginal cost, but will raise its total costs. Should the monopolist make the investment? A. No. Lowering marginal cost would force the firm to overproduce. B. Yes, if the investment deters entry and the post investment profit is higher than post entry profit without the investment. C. Yes, but only if the potential entrant cannot make the same cost lowering investment. D. No. This action is not profit maximizing; the higher total cost will cause the firm to lose money.
Learning by doing can only be a strategic cost advantage for an incumbent facing potential entry if: O A. the firm can significantly lower its marginal cost relative to its rivals' and learning is extremely rapid. B. learning occurs rapidly enough that the firm can gain a significant marginal cost advantage over its rivals. O C. learning occurs slowly enough that rivals are unable to catch up. OD. the firm can significantly lower its marginal cost relative to its rivals' and learning is not too rapid.

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1. Yes, if the investment deters entry and the post investment profit is higher than the post entry profit without the investment.
Most of the monopolist will tried to avoid the entry of new firms. Thus the firms will adopt proper policies which restrict the entry. The purchase of the high cost investment will create the increasing cost in the firm, but the firm wish to purchase that, to avoid the competition in the market. At the same time, the firm will charge a higher price which is comparatively greater than the marginal cost. Thus the firms will attain more level of profit than before. The firms are ready to face this high cost incurred behind the purchase of this high cost investment. The post profit will be greater than the pre profit level, which is before and after the purchase of this new investment.
2. The firm can significantly lowers its marginal cost relative to its rivals and learning is not too rapid.
Learning by doing is a slow or gradual process, which took long time. At this learning time, the firms will try to reduce its cost which helps to compete with other firms in the market. The reduction in marginal cost can be done through using incentives and other subsidiary measures which proposed by the government and other agencies.

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