A foreign exchange student bought a used car for $10,000 and resold it one year later for $6,500. Insurance, license, and operating costs for the year were $1,500. What was his economic cost of owning and operating the car for the year if the market rate of interest was 10 percent?

Question

Quizplus · Accepted Answer

The economic cost of owning and operating the car can be calculated as follows:

Total cost = Purchase price - Sale price + Operating costs
Total cost = $10,000 - $6,500 + $1,500
Total cost = $5,000

However, we need to account for the fact that the foreign exchange student could have earned interest on the initial $10,000 instead of spending it on the car. The opportunity cost of owning the car can be calculated as:

Opportunity cost = Purchase price x Interest rate
Opportunity cost = $10,000 x 0.10
Opportunity cost = $1,000

Therefore, the economic cost of owning and operating the car for the year is:

Economic cost = Total cost + Opportunity cost
Economic cost = $5,000 + $1,000
Economic cost = $6,000

Hence, the correct answer is C ($6,000).

A Foreign Exchange Student Bought a Used Car for $10,000