Question

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 outright. this​ year, the museum earned a total of​ $1.4 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 bonds are currently paying a rate of 1010 percent to those who buy them.

Answer 1

To calculate Ben's economic profit we have to use the following formula:

economic profit = total revenue - accounting costs - implicit costs

where:

• total revenue - accounting costs = $1,400,000
• Ben's implicit cost is $350,000 (= 10% x $3,500,000).

economic profit = $1,400,000 - $350,000 = $1,050,000 or 30% rate of return