Question

Sue purchased a house for $89,000, spent $56,000 upgrading it, and currently had it appraised at $212,900. The house is being rented to a family for $1,200 a month, the maintenance expenses average $200 a month, and the property taxes are $4,800 a year. If she sells the house she will incur $20,000 in expenses. She is considering converting the house into professional office space. What opportunity cost, if any, should she assign to this property if she has been renting it for the past two years?

Answer 1

Answer : Opportunity Cost is the cost of choosing one alternative over the other alternative.If Sue decidesd to convert the house into professional office space she could no longer sell the house.

In this case

Opportunity Cost = Current Value - Expenses which will be incurred if decides to sell

= 212,900 - 20000

= $192,900

Opportunity cost she should she assign to this property is $192,900