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24 July, 00:38

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

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  1. 24 July, 01:46
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    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
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