Andrew decides to open a laboratory in his basement. He quits his job, sacrificing $30,000 a year; cashes in $200,000 of Canada Savings Bonds that were paying him an interest rate of 5 percent per year; and evicts a tenant who was paying $10,000 a year in rent to live in the basement. The opportunity cost of Andrew's decision is

Question

Quizplus · Accepted Answer

The opportunity cost is the value of the next best alternative that was sacrificed. In this case, Andrew sacrificed three things: his job, his Canada Savings Bonds, and the rental income he was receiving from his tenant.

The cost of quitting his job is straightforward. He sacrificed $30,000 a year, so that is $30,000 of opportunity cost per year.

In the case of cashing in his Canada Savings Bonds, the opportunity cost is the forgone interest that he would have received if he hadn't cashed them in. The bonds were paying him 5 percent per year, so his annual interest earnings would have been $10,000 (5 percent of $200,000). Therefore, the opportunity cost of cashing them in is $10,000 per year.

Evicting his tenant means that he's no longer receiving the $10,000 in rental income. Therefore, the opportunity cost of this decision is $10,000 per year.

Add up all three opportunity costs and you get $30,000 + $10,000 + $10,000 = $50,000. Therefore, the best choice is B, with an opportunity cost of $50,000.

Andrew Decides to Open a Laboratory in His Basement