Question

Semi-Salt Industries began its operation in 1975 and remains the only firm in the world that produces and sells commercial-grade polyglutamate. While virtually anyone with a degree in college chemistry could replicate the firm’s formula, due to the relatively high cost, Semi-Salt has decided not to apply for a patent. Despite the absence of patent protection, Semi-Salt has averaged accounting profits of 5.5 percent on investment since it began producing polyglutamate—a rate comparable to the average rate of interest that large banks paid on deposits over this period. Do you think Semi-Salt is earning monopoly profits? Why?

Answer 1

Solution

No,Semi-Salt Industries is not earning monopoly profits.It is given that it is generating accounting profits of 5.5 % on investments whcih is comparable to the average rate of interest that large banks paid on deposits.In a monopoly the profits are generally high due to lack of competition.As firms with a profit maximization motive,they should be able to generate a return more than that offered by banks / other financial institutions.If it is not able to do that it has the option to deposit it's entire investment in the financial institution.

Since the company is operating in a monopoly, it will be having the capacity to earn more i.e., more than 5.5% as there is no competition.If it is facing difficulties in terms of low sales (or) so , then it can increase its revenue and ultimately profits by following price discrimation strategy.

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