A millionaire rents a house for a constant $8,000 a year and keeps his millions in a money market fund that always earns 5% a year. He is given the option of buying the house for $200,000. If he buys the house, assume he can sell it anytime in the future for exactly $200,000. Should he buy the house or keep renting, and why? (Ignore taxes and maintenance costs.) What is the opportunity cost of buying the house? Would your answers to the above questions change if the rent was $11,000 a year? Please explain.
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If he buys the house, the opportunity cost is 200000*5%=10000 per year>8000 so he should not buy the house.
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