Zelda Industries is the only firm of its kind in the world. Due largely to histo
ID: 1209774 • Letter: Z
Question
Zelda Industries is the only firm of its kind in the world. Due largely to historical accident, it began producing streganomas in 1985 in a vacant warehouse. Virtually anyone with a degree in college chemistry could easily replicate the firm`s formula, which is not patent protected. nonetheless, since 1985 Zelda has averaged accounting profits of 6 percent on investment. This rate is comparable to the average interest rate that large banks paid on deposits over the period.Do you think Zelda is earning monopoly profits? Why?
Explanation / Answer
No
Explanation: Zelda could have invested funds over the period at 6 percent. Its accounting profts of 6% coverts into zero economic profts. Most likely, Zelda operates in a contestable market, and is disciplined by the threat of entry by other frms. Therefore, Zelda cannot charge prices in excess of marginal cost.
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