Suppose a Mechanic Uses $150,000 of His Own Money to Start

question 56

Multiple Choice

Suppose a mechanic uses $150,000 of his own money to start a business. The rate of interest he could earn in a savings account is 5 percent, and the rate of interest he could earn by investing in bonds is 8 percent. What is the opportunity cost of capital when the mechanic uses his money to start his own business?

• A)$8,000/year
• B)$7,500/year
• C)$150,000
• D)$12,000/year
• E)$19,500/year

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Definitions:

Income Change

A variation in the amount of earnings received by a person, household, or economic entity over a period.

Inferior Good

A good for which an increase in income reduces the quantity demanded

Good A

A placeholder term typically used in economic models to represent a generic item or service in the market.

Income Falls

A situation where an individual's or group's earnings decrease over a period of time.