Answered: . How much excess profit is Ted…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 2PA

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4. Ted Baxter runs a small, very stable newspaper company in
southern Oregon. The paper has been in business for 25 years.
The total value of the firm’s capital stock is $1 million, which Ted
owns outright. This year the firm earned a total of $250,000
after out-of-pocket expenses. Without taking the opportunity
cost of capital into account, this means that Ted is earning a
25 percent return on his capital. Suppose that risk-free bonds
are currently paying a rate of 10 percent to those who buy them.

d. How much excess profit is Ted earning?

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