Opportunity Cost: Apartment Leasing

Question:

Mr. Chan owns a flat in Mongkok. The following is his order of preference of ways to use his flat:

First choice: rent it to a tenant

Second choice: living in his flat

(a)    What is the opportunity cost of the first choice? (2 marks)

(b)  If the tenant declines to pay rent and deliberately ruin the flat, explain how this affects the opportunity costs of the first choice. (4 marks)

Answer:

(a)

Cost refers to the highest-valued option forgone. (1)

The cost is the use value forgone from living in the flat. (1)

(b)

The decline to pay rent does not affect the cost. (1)

but the net value of the first choice. (1)

However, Mr. Chan has to pay extra scarce resource for maintenance which ha alternative use. (1)

This raises the cost of the first choice. (1)