Question
you loan a friend 100, and at the end of one year she writes you a check for 100 to pay off this loan. If
you loan a friend 100, and at the end of one year she writes you a check for 100 to pay off this loan. If the annual interest rate on your savings account is 1%, the inflation rate is 2%, your wages are growing at 3%, your friend's wages are growing at 4%, the unemployment rate is 5%, and you have large outstanding credit card debts with an interest rate of 10%, what was your opportunity cost of making this loan?
answer 10%
The opportunity cost of anything is what you give up to get it. In this case, the opportunity cost of lending the 100 to your friend is that your already large (presumably much more than 100) credit card debt was higher than it should have been, so the opportunity cost was 10. The interest rate on your bank account does not matter (because it is so much less than 10%) and the other numbers are totally irrelevant.
Please explain why does the interest rate does not matter intuitively?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started