Final answer:
The opportunity cost of the building increases to $5,000 when the rental value rises due to increased real estate values, as it represents the forgone rental income by using the building for business purposes.
Step-by-step explanation:
If a business buys a building when similar buildings rent for $4,000 per month and later the real estate values rise, causing rents to increase to $5,000 per month, the business's opportunity cost of its building increases to $5,000. Opportunity cost is the benefit that is missed or given up when an investor, individual, or business chooses one alternative over another. Therefore, if the business could now potentially rent out its building for $5,000 instead of $4,000 due to the rise in market rents, it is foregoing an additional $1,000 in rental income by continuing to use the building for its own purposes rather than renting it out. In essence, the opportunity cost has increased by the same amount that the rental value has increased.
Opportunity cost refers to the value of the next best alternative that must be given up when making a choice. In this scenario, the opportunity cost of the building is unaffected by the increase in rents because the business already owns the building. The increase in rents does not directly impact the business's decision to purchase the building.