The opportunity cost of capital for a consumer's investment decision depends on their financial situation. Which rate should the consumer use?

Question

Quizplus · Accepted Answer

The opportunity cost of capital will vary based on the financial situation of the consumer. If the consumer is a net saver, they should use the interest rate on investment opportunities since they have excess funds to invest. However, if they are a net debtor, they should use the interest rate paid on debts since they are paying interest on those debts instead of earning interest. Therefore, both options A and B are correct and should be considered when determining the opportunity cost of capital for a consumer's investment decision. The interest rate used by local firms may not be relevant to the consumer's situation and therefore, option D is not the best choice in this case.

The Opportunity Cost of Capital for a Consumer's Investment Decision