Question

What is Ben's opportunity cost of capital and excess profit?

Ben Cartwright runs the Wild West Wax Museum in Carson City, Nevada. The museum has been in business for 40 years and is a major tourist attraction. The total value of the museum's capital stock is $3.5 million, which Ben owns o This year, the museum earned a total of S1.4 million after out-of-pocket expenses. Without taking the opportunity cost of capital into account, this means that Ben is earning a 40 percent return on his capital Suppose that risk-free bon currently paying a rate of 6 percent to those who buy them. What is meant by the "opportunity cost of capital? O A. The value of capital B. The implicit cost of capital O C. The present discounted value of capital O D. The explicit cost of capital O E. The accounting cost of capital Explain why opportunity costs are real" costs even though they do not necessarily involve out-of-pocket expenses. O A. The capital represents an out-of-pocket expense for capital owners and investors. B. The capital could have instead earned a normal rate of return invested in risk-free government bonds. O C. Those who borrow capital must pay capital owners or investors a normal rate of retum. O D. The capital could have earned more than the capital's out-of-pocket expenses invested in bank certificates of deposit. O E. Those who own capital must pay taxes equal to the normal rate of return from bank certificates of deposit. The opportunity cost of Ben's capital is s(Enter your response as a whole number) Ben is earning an excess profit of S(Enter your response as a whole number)

Answer 1

B The implicit cost of capital

Explanation: Implicit cost of capital is the opportunity cost of capital which is already incurred but not reported as a separate cost/expense, Implicit cost is the cost which results from using an existing asset instead of selling or renting it.

For example when a businessman uses his/her existing land which has implicit cost of say $1000 per month but bought it for say $100 many years ago, so $1000 is its implicit cost/current market rent per month which is equal to its opportunity cost which businessman forgoes for not renting it out to some other company/individual.

Answer B- Explanation: Opportunity cost is the difference of return between two investments and opportunity cost is the foregone rate of return by investing that amount anywhere , i.e.risk free government bonds.

The opportunity cost of Ben's capital is $21000

Ben is earning an excess profit of $119000