The principle of opportunity cost applied to real estate means:
Correct Answer
B) An investment's value reflects returns forgone elsewhere
Why this is correct: Opportunity cost is the return an investor gives up by choosing one investment over the next best alternative. In real estate, this principle means the required return (discount rate) for a property is set by competing investment opportunities, as the explanation states. Why the other choices are wrong: Property taxes are an actual cost, not the opportunity cost. Buyers do not always choose the cheapest alternative; they seek the best value. Land value is not simply its acquisition cost; it is based on its income potential. Exam tip: The discount rate embodies opportunity cost—what else the investor's money could earn.
Why This Is the Correct Answer
Why this is correct: Opportunity cost is the return an investor gives up by choosing one investment over the next best alternative. In real estate, this principle means the required return (discount rate) for a property is set by competing investment opportunities, as the explanation states. Why the other choices are wrong: Property taxes are an actual cost, not the opportunity cost. Buyers do not always choose the cheapest alternative; they seek the best value. Land value is not simply its acquisition cost; it is based on its income potential. Exam tip: The discount rate embodies opportunity cost—what else the investor's money could earn.
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