You have $1000. You can spend it on a TV or put the money in the bank at 4% interest for a year. What is the opportunity cost of buying the TV today?
The opportunity cost of buying the TV today is the potential gain from investing the money in the bank at 4% interest. To calculate the opportunity cost, we can consider what the money would be worth after one year if invested at 4% interest.
First, let's calculate the interest earned on $1000 at 4% for one year. The formula to calculate simple interest is:
Interest = Principal × Interest Rate × Time
In this case, the principal (P) is $1000, the interest rate (R) is 4%, and the time (T) is 1 year.
Interest = $1000 × 0.04 × 1
Interest = $40
Therefore, if you were to put the $1000 in the bank at 4% interest for a year, you would earn $40 in interest.
Now, let's consider the opportunity cost. The opportunity cost is the forfeited gain from choosing one option over another. In this case, if you choose to buy the TV instead of putting the money in the bank at 4% interest, you would lose out on the $40 of interest you could have earned.
Hence, the opportunity cost of buying the TV today is $40, which is the potential gain from investing the money in the bank at 4% interest for a year.