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Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992

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BuyFindarrow_forward

Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992
Chapter 3, Problem 1TY
Textbook Problem
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A person rents a house for $24,000 per year. The house can be purchased for $200,000, and the tenant has this much money in a bank account that pays 4 percent interest per year. Is buying the house a good deal for the tenant? Where does opportunity cost enter the picture?

To determine

To examine: whether the tenant should buy the house or rent it. Concept of opportunity cost is to be explained in this context.

Explanation of Solution

The interest which the tenant is getting from the bank is:

   i=$200,000×4100=$8,000

The annual rent paid by the tenant is $ 24000.

The adjusted rent ($24000 - $8000) = $16000.

Here, buying the house will be a good deal because he is paying more rent as compared to the interest which he is receiving from the bank.

Here, the opportunity cost of buying the house is forgoing the interests on the deposits which is equal to $8000.

Economics Concept Introduction

Opportunity Cost:

The opportunity cost of a commodity is the amount of the next best alternative that is foregone in order to pursue one course of action. It is the expense of different items which has been surrendered.

For instance, delivering 1 unit of the bike reduces the production of 15 cycles as labor is used in the production of bike. Here, for this situation, the opportunity cost of delivering 1 bike is 15 cycles.

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