Answer
Option 2
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Accounting profit =total revenue -total explicit costs
=120000-60000
=$60000
Opportunity cost is equal to the interest and the salary
Economic profit before interest =accounting profit -salary=60000-40000=20000
The opportunity cost of interest is equal to $20000 if the interest rate is 5%
amount =20000/0.05=400000
so he took $400000 from saving
if the interest rate decreases the interest decreases and economic profit increases and if the increase rate is above 5% he is in economic losses.
as
Economic profits =accounting profit -implicit costs
implicit costs =interest amount +salary forgone=20000+40000=60000 ...........@i=5%
Economic profit =60000-60000=0 as he will not prefer to take the risk because there is no economic profit above 5% but as the interest rate decreases the economic profit increases.
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