Why does renting become more attractive when the after-tax investment return increases?

• A. Because higher investment returns reduce the cost of home ownership.
• B. Because renting allows individuals to avoid paying taxes on investment returns.
• C. Because the opportunity cost of tying up money in home ownership rises, making renting preferable.
• D. Because landlords are required to lower rent when investment returns increase.

Answer: (C)

Verified step by step guidance

1. Understand the concept of opportunity cost in the context of home ownership versus renting. Opportunity cost refers to the value of the next best alternative foregone when making a decision.
2. Recognize that when you buy a home, you tie up a significant amount of money in the property, which could otherwise be invested elsewhere to earn a return.
3. When the after-tax investment return increases, the potential earnings from investing that money outside of home ownership become higher.
4. This means the opportunity cost of using your funds to buy a home (instead of investing them) rises, because you are giving up higher returns you could have earned.
5. As a result, renting becomes more attractive since it allows you to keep your money invested and earn the higher returns, rather than locking it into home ownership.