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Suppose Joe purchases the factory using $200,000 of his own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Joe’s annual opportunity cost of purchasing the factory?

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Answer:

$18,000

Explanation:

The opportunity cost refers to the extra costs or benefits lost from choosing one activity or investment over another.

In this case, Joe's opportunity cost = interest earned by his savings account + interest paid to the bank = ($200,000 x 3%) + ($200,000 x 6%) = $6,000 + $12,000 = $18,000

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