To ascertain: the better for a person in a given situation and the
Explanation of Solution
The rent of the house is $24000 per year.
The person has $200,000 in the bank account that pays 4% interest per year.
So, the annual return on bank saving is $8,000.
If the person buys the house, he/she can save $16,000 (= $24,000 - $8,000) per year because he/she has to forgo $8,000 interest payment on the amount deposited in the bank. Therefore, buying a house is a good deal for the person.
The interest earned on the amount deposited in the bank ($8,000) is the opportunity cost of buying a house because the person is foregoing interest receipts when he/she puts the amount of $200,000 in the purchase of the house.
Want to see more full solutions like this?
Chapter 3 Solutions
Macroeconomics: Principles and Policy (MindTap Course List)
- Emily buys an air conditioner that costs $700. Because the air in her home is cleaner, its use saves her $250 in curtain cleaning costs over the lifetime of the air conditioner. In money terms, what is the opportunity cost of the air conditioner?arrow_forwardYour group won $100 from a Tiktok dance challenge. You have a choice between spending the money now and putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the $100 now? (support your answer with computations and discussion)arrow_forwardIdentify a recent purchase that you made, recently, and determine how scarcity influenced your purchase decision.arrow_forward
- What does the law of increasing opportunity cost state?arrow_forwardIncentives and opportunity costs. Why do we do the things we do, and how do opportunity costs show that we have to make sacrificesarrow_forwardYou can either spend spring break working at home for $80 per day or go to Florida for the week. If you stay home, your expenses will total about $100. If you go to Florida, the airfare, hotel, food, and miscellaneous expenses will total about $700. What’s your opportunity cost of going to Florida?arrow_forward
Microeconomics: Principles & PolicyEconomicsISBN:9781337794992Author:William J. Baumol, Alan S. Blinder, John L. SolowPublisher:Cengage Learning
Exploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, Inc
