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paolo currently has 100,000 invested in bonds that earn him 10 percent interest per year. He wants to open a pizza restaurant and is considering either selling the bonds and using the 100,000 to start his restaurant or borrowing the 100,000 from a bank which would charge him an annual interest rate of 7 percent. He finally decides to sell the bonds and not take out the bank loan. He reasons, "Because I already have the $100,000 invested in the bonds, I don't have to pay anything to use the money. If I take out the bank loan, I have to pay interest, so my cost of producing pizza will be higher if I take out the loan than if I sell the bonds. "What do you think of Paolo's reasoning?

Microeconomics, Economics

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