You are a University student who must live off-campus in the second year. There are two types of one-bedroom apartment where you prefer to live because it is near the campus. One rents for $400 per month and the other $360. According to the University Students’ Housing Bureau 80 percent of apartments in the area consists of the $400 type while the remaining 20 percent are of the $360 type. You need to visit the apartments to discover the rent. Suppose the first apartment you visit cost $400 and the opportunity cost of your visit is $6 per visit. 1. If you are risk neutral person should you visit another apartment or rent the one you have found. 2. Suppose you visit another apartment and find out that it rents for $400, should you visit another apartment?
You are a University student who must live off-campus in the second year. There are two types of one-bedroom apartment where you prefer to live because it is near the campus. One rents for $400 per month and the other $360. According to the University Students’ Housing Bureau 80 percent of apartments in the area consists of the $400 type while the remaining 20 percent are of the $360 type. You need to visit the apartments to discover the rent. Suppose the first apartment you visit cost $400 and the
1. If you are risk neutral person should you visit another apartment or rent the one you have found.
2. Suppose you visit another apartment and find out that it rents for $400,
should you visit another apartment?
Opportunity Cost is defined as the cost of the next best alternative or the cost that is forgone.
Risk Neutral is defined as a mindset of an individual to risk while making an investment decision. Such an individual does not focus on the risk that the investment possesses. This kind of mindset does not depend on prices or calculations, but on emotional preference.
Given,
Two types of one-bedroom apartments near campus.
One rents for $400 per month and the other $360 per month
80% are $400 type and $20% are $360 type.
The first apartment visited costs $400
Opportunity cost is $6
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