After working for 25 years as personal fitness trainers whil

After working for 25 years as personal fitness trainers while raising their? kids, three sisters cashed in a total of ?$120 comma 000 in bonds and decided to open a? small, neighborhood fitness center. They spent the ?$120 comma 000 on exercise? equipment, advertising, computer? equipment, and other furnishings for the business. For the next 3? years, they took in ?$145 comma 000 in revenue each? year, paid themselves ?$33 comma 000 annually? each, and rented a space in a strip mall for ?$22 comma 000 per year. Before the? investment, their ?$120 comma 000 in bonds were earning interest at a rate of 6 percent. Are they now earning economic? profits? Explain? your answer. A. They are earning profits of ?$115 comma 800 ?, which takes into account the ?$7 comma 200 opportunity cost of their capital. B. They are earning profits of ?$16 comma 800 ?, which takes into account the ?$7 comma 200 opportunity cost of their capital and the ?$99 comma 000 combined opportunity cost of their own labor. C. They are earning profits of ?$123 comma 000 ?, which takes into account the opportunity cost of their capital. D. They are earning profits of ?$3 comma 000 ?, which takes into account the ?$120 comma 000 opportunity cost of their capital.

Solution

Total revenue earned = $145,000

Wages paid (opportunity cost of the labor) = $33,000 * 3 = $99,000

Rent paid = $22,000

Total explicit cost = Wages paid + Rent paid = $99,000 + $22,000 = $121,000

The three sisters has cashed in their bonds.

This means they are now forgoing 6% interest on the bonds that they were earning till now.

So, this foregone interest is the opportunity cost of capital.

Foregone interest = $120,000 * 0.06 = $7,200

Calculate the economic profit -

Economic profit = Total revenue - Total explicit cost - Foregone interest

Economic profit = $145,000 - $121,000 - $7,200 = $16,800

Thus,

The three sisters are earning economic profits of $16,800, which takes into account the $7,200 opportunity cost of capital and the $99,000 combined opportunity cost of their own labor.

Hence, the correct answer is the option (B).