MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 3, Problem 1TY
To determine
To ascertain: the better for a person in a given situation and the
Expert Solution & Answer
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.
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