Question

-What is opportunity cost and what is an example of this from your life?
-Do you think student loans offer an attractive rate for “capital” for students to attend college? Why or why not?
-Do you have student loans? What do you think about the interest rates?
-What affect do the current interest rates, which are in essence determined by The Federal Reserve Bank, have on the cost of capital to firms and consumers?

Answer 1

Opportunity Cost

Opportunity cost represents the benefits of an individual , business or an investor misses out on when choosing one alternative over another.

Example from the life is :The total cost for an MBA course will be arounfd 12 lakhs. If we are investing this amount in Bank / any portfolio we will get a good return.So this return a student misses whenever he chooses his/ her MBA course.

The courses at colleges are especially have high price. Usually these loans won't made an attractive rate for the students to attend college.So the outcome is perverse

I have no student loans .The interest rate for student loans are usually around 10-11%

One of the Federal Reserve Bank tools for managing money is to change interest rates.

The mechanism is like this : High interest rates make money more expensive and contract the amount of money in circulation and in banks. Low interest rates make money less expensive and increase the money supply.

So it influences the cost of capital of the firm, because it is the minimum expected amount that the investors invest.