Lucky Louie is considering a NOW account that requires a $1500 minimum balance and pays .5% interest. What would be the opportunity cost if Louie needs to withdraw the required minimum balance from a savings account paying 2% interest? Compute the opportunity cost for one year.

Question

Quizplus · Accepted Answer

The opportunity cost is the difference in interest earned between the two accounts. If Louie withdraws $1500 from a savings account paying 2% interest, he would lose $30 (1500 * 0.02) in interest over a year. In the NOW account, that $1500 would earn $7.50 (1500 * 0.005) in interest over a year. The opportunity cost is the interest lost from the savings account minus the interest earned in the NOW account: $30 - $7.50 = $22.50.

Lucky Louie Is Considering a NOW Account That Requires a $1500