Carlos plans to start a new dry cleaning business. For that he purchased a space which costed him $100,000. For that he withdrew his savings worth $50,000 and borrowed the remaining $50,000 from a bank. His savings was earning him 3% interest per annum and the banks charges him 6% interest per annum. Based on this what would be Carlos opportunity cost of purchasing the space

Question

01-08-2019
Business

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Carlos plans to start a new dry cleaning business. For that he purchased a space which costed him $100,000. For that he withdrew his savings worth $50,000 and borrowed the remaining $50,000 from a bank. His savings was earning him 3% interest per annum and the banks charges him 6% interest per annum. Based on this what would be Carlos opportunity cost of purchasing the space

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Nyctalus Nyctalus · Answer 1 · 2019-08-12T07:09:31+02:00

Answer: $1500

Explanation: As per the theory of microeconomics, opportunity cost is the cost of loosing the profits from the best alternative that was not selected. In simple words, it is the real cost of output foregone.

Usually opportunity cost is used to describe relationship between scarcity and choice.

In the given case Carlos was earning interest on savings but rather than that he invested it in the business. Therefore :-

opportunity cost = $50,000 * 3% = $1500