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 12 percent to those who buy them.

a. What is meant by the “opportunity cost of capital”?

b. Explain why opportunity costs are “real” costs even though they do not necessarily involve out-of-pocket expenses.

c. What is the opportunity cost of Ben’s capital?

d. How much excess profit is Ben earning?