Question

Oprah just inherited a house with a market value of $100,000, and she does not expect the market value to change. Each year, she will pay $750 for utilities and $4000 in taxes. She can earn 6 percent interest on money in a bank account. Her cost of living in the house for the year is ? (Enter your response rounded to the nearest dollar)

Answer 1

Oprah's cost of living in the house for the year is $10,750 when combining her expenses for utilities and taxes with the opportunity cost of not earning interest on the home's market value if it were in a bank account.

Step-by-step explanation:

To calculate Oprah's cost of living in the house for the year, we need to combine her expenses and consider the opportunity cost of not investing the house's value in a bank account. The expenses include $750 for utilities and $4000 for taxes. The opportunity cost is the amount of interest she would have earned if she had the $100,000 in a bank at a 6 percent interest rate instead of it being tied up in the house value.

The opportunity cost is calculated as $100,000 multiplied by 6 percent, which equals $6,000. Therefore, her total cost of living in the house for the year is the sum of her expenses plus the opportunity cost:

• $750 (utilities)
• $4,000 (taxes)
• $6,000 (opportunity cost of not earning interest)

The total cost is $750 + $4,000 + $6,000 = $10,750 for the year.