Microeconomics: Principles & Policy
14th Edition
ISBN: 9781337794992
Author: William J. Baumol, Alan S. Blinder, John L. Solow
Publisher: Cengage Learning
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Question
Chapter 3, Problem 1TY
To determine
To examine: whether the tenant should buy the house or rent it. Concept of
Expert Solution & Answer
Explanation of Solution
The interest which the tenant is getting from the bank is:
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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