Question

You win \(100 in a basketball pool. You have a choice between spending the money now and putting it away for a year in a bank account that pays 5 percent interest. What is the opportunity cost of spending the \)100 now?

Short answer

The opportunity cost of spending $100 now will be the interest received from the bank. The interest amount will be $5.

Step-by-step solution

Interest received on $100

The rate of interest is 5%, and the principal amount is $100. P is $100, and r is 5%.

$$\begin{gathered} Interest=P\times \frac{r}{100} \\ =100\times \frac{5}{100} \\ =\$5 \end{gathered}$$

The interest will be $5

Opportunity cost between spending money and depositing it

The opportunity cost is the gain or loss experienced by an individual by choosing one over the other choice or option. The interest amount will be $5 if deposited in the bank. The opportunity cost will be $5, which cannot be earned if the money is spent now.