Zelda Industries is the only firm of its kind in the world. Due largely to histo

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. In fact, Zelda could have invested funds over the period at 6 percent. Its accounting profits of 6 percent translate into zero economic profits. Most likely, Zelda operates in a contestable market, and is disciplined by the threat of entry by other firms. Therefore, Zelda cannot charge prices in excess of marginal cost.

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