Stuck on this problem.

zad

New member
Joined
Sep 14, 2019
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1
what is the answer of number 2
2. You just inherited a house with a market value of $300,000, and do not expect the value to change. Each year, you will pay $1,000 for utilities and $3,000 in taxes. You can earn 6% interest on the money in the bank. Your cost of living in the house for a year is $_____.
 
The difficulty I'm having here is that the three sentences of the problem text don't seem to be related to each other in any way. For instance, the third sentence mentions earning interest on money in the bank... but what money? In what bank? Nothing in the problem text mentions anything about a bank or having any money in said bank.

As it stands, unless there's more information you chose not to include, such as perhaps something in part (1) informing the correct line of reasoning to part (2), or some sort of introduction paragraph telling you "For problems 1-5, assume that (blah blah blah)," the answer seems to come from reading and understanding the second sentence. The first and third sentences appear to just be red herrings and/or irrelevant fluff.
 
I'm guessing bank interest is relevant because not investing the money contributes to the total cost.
 
You must spend $1000+ $3000= $4000 per year to live in the house. In addition, you lose the interest, 0.06($4000)= $240, you could have earned had you put that $4000 in the bank. It "cost" you $4240 to live in the house.

(Of course, this is completely ignoring the cost of living somewhere else.)
 
I thought the opportunity cost applied to the value of the house. It's actually utilities and taxes?
 
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