Question

if the market interest rate is 5 percent, the opportunity cost of $100 spend on the purchase of goods: a. is $105 today. b. is $105 next year. c. is $5 today. d. is $5 next year. e. cannot be determined unless the consumer's rate of time preference is

Answer 1

The opportunity cost of spending $100 today when the market interest rate is 5 percent is the $5 that could have been earned as interest by next year.

Step-by-step explanation:

The question asks if the market interest rate is 5 percent, what is the opportunity cost of $100 spent on the purchase of goods? Opportunity cost in this context refers to the benefits foregone by choosing to spend the money on goods instead of saving it and earning interest. Since the market interest rate is 5 percent, if you did not spend the $100 on goods, you could have invested that money and earned an interest of $5 after one year ($100 x 5% = $5). Therefore, the opportunity cost of spending the $100 today is not having the additional $5 that could have been earned by the next year.