Opportunity Cost of Purchasing a Factory for Korie

What is the annual implicit opportunity cost of purchasing the factory for Korie?

a. $3,000
b. $12,000
c. $0
d. $15,000

Answer:

The annual implicit opportunity cost of purchasing the factory with Korie's own money is $12,000 (option b).

The annual implicit opportunity cost of purchasing the factory with Korie's own money is the amount of interest she could have earned on her $400,000 if she did not use it to buy the factory. At 3 percent interest per year, Korie would earn $12,000 in interest on $400,000.

Therefore, the answer is $12,000. If Korie purchases the factory with her own money, the annual implicit opportunity cost of purchasing the factory is the foregone interest that she could have earned on her bank account.

Korie has $500,000 in the bank, earning 3 percent interest per year. If she uses $400,000 to purchase the factory, she will lose out on the interest that the $400,000 could have earned.

To calculate the opportunity cost, we can use the formula:

Opportunity cost = (Amount used for investment) x (Interest rate)

Opportunity cost = $400,000 x 3%
Opportunity cost = $12,000