Alex rents a house for 24000 per year The house can be purch

Alex rents a house for $24,000 per year. The house can be purchased for $200,000, and he has this much money in a bank account that pays 4 percent interest per year. What is Alex\'s opportunity cost of buying a house? $8,000 per year $24,000 per year $50,000 per year $200,000 Is buying the house a good deal for Alex? No Yes

Solution

Opportunity cost is the value foregone in order to choose another alternative. In order to buy the house, Alex will have to forego the 4% interest that he receives his deposit. Therefore, Alex will forego 4% of $200,000 = $200,000 * 4/100 = $8,000 per year.

So, Alex\'s opportunity cost of buying the house = $8,000 per year.

Buying the house is a good deal for Alex. Yes.

Explanation: If Alex rents the house, he needs to pay $24,000 a year. When he buys the house, he needs to incur only $8,000 a year which is the opportunity cost. So, buying the house is a good deal. Note that the purchase price was not considered as the purchase price can be received by selling the house.