If you make an interest-free loan of $10,000 to a friend to help her get started in her new business and the interest rate charged by banks on similarly-risky loans is 15%,then the opportunity cost of the loan is equal to
A) $10,000.
B) $1,500.
C) $11,500.
D) $0.
E) $8,500.

Question

Quizplus · Accepted Answer

The opportunity cost of a decision is the cost of the next best alternative. In this case, if you did not lend the $10,000 to your friend, you could have invested that money in a bank and earned a 15% interest rate. Therefore, the opportunity cost of not investing the $10,000 is equal to the interest you could have earned, which is $1,500 (15% of $10,000). So the best choice is (B) $1,500.

If You Make an Interest-Free Loan of $10,000 to a Friend