Question

Kieran owns and operates his own bike shop. In the past week, he received two offers: one to work for a competitor for $50,000 per year and one to sell his bike shop for $100,000. Assume the annual interest rate is 6 percent, and Kieran is indifferent between owning his bike shop or working for the competitor. Kieran currently receives enough annual revenue to cover all explicit costs and has $60,000 left over. There are no additional implicit costs (excluding the items listed above). Under these circumstances, Kieran's economic profit is equal to which of the following?A. −$96,000B. −$90,000C. $4,000D. $10,000E. $60,000

Answer 1

Answer:

C. $4000

Explanation:

Given that

Total opportunity cost = salary plus interest forgone, that is 50,000 + 6% of 100,000

= 50,000 + 6000 = 56,000.

Total revenue received = 60,000

Recall that

Economic profits = Revenue - (implicit + explicit cost)

And that

Implicit cost = opportunity cost = 56,000

Explicit cost = 0 (from the question, revenue covered it)

Thus

Economic profit = 60000 - 56000

= $4000