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Recently, a woman named Mary Krawiec attended an auction in Troy, New York. At the auction, a bank was seeking to sell a foreclosed property: a large Victorian house suffering from years of neglect in a neighborhood in which many properties had been on the market for years yet remained unsold. Her \(10 offer was the highest bid in the auction, and she handed over a \)10 bill for a title to ownership. Once she acquired the house, however, she became responsible for all taxes on the property and for an overdue water bill of \(2,000. In addition, to make the house habitable, she and her husband devoted months of time and unpaid labor to renovating the property. In the process, they incurred explicit expenses totaling \)65,000. Why do you suppose that the bank was willing to sell the house to Ms. Krawiec for only $10? (Hint: Contemplate the bank鈥檚 expected gain, net of all explicit and opportunity costs, if it had attempted to make the house habitable.)

Step by step solution

01

Step 1. Opportunity Cost

Opportunity cost is the cost of the opportunity forgone of the alternative choices to satisfy wants.

02

Step 2. Reason.

The expenses of making the house habitable were expensive and the opportunity cost will be less when selling the house to Ms. Krawiec.

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