Suppose your wealthy aunt has given you a gift of $25,000. You have come up with three options for spending (or investing) the money. First, you’d like (but do not need) a new car to brighten up your home and social life. Second, you can invest the money in a high-tech firm’s common stock. It is expected to increase in value by 20% per year, but this option is fairly risky. Third, you can put the money into a three-year certificate of deposit with a local bank and earn 6% per year. There is little risk in the third option.
a. If you decide to purchase the new car, what is the opportunity cost of this choice? Explain your reasoning.
b. If you invest in the high-tech common stock, what is the opportunity cost of this choice? Explain your reasoning.