Lynn, the first thing to do is to get some bids from local electrical contractors. I'm with Joe from Texas. If the old knob and tube is in good condition without any frayed or bare wires (which the inspection should have caught) then it is still ok. However K&T just like old 2 wire sheathed electrical cable doesn't have an equipment grounding wire. To have an actual equipment grounding wire for grounding of appliances and computers, you will need to run all new sheathed electrical cable/conduit with all new wiring with a ground wire run inside with the conductors. At the same time you would need a new main panel and a 200 amp panel would be appropriate. Your old wiring probably won't have 200 amp service entrance cable and meter, etc. and to go to 200 amp you may have to run all new wire from the pole which gets expensive. If your service entrance will handle a 100 amp panel then that would work better than what you got for an older house.
The NEC does not allow someone to just put a 3 prong receptacle on a 2 wire w/o ground system and especially K&T. People would be fooled(just like your downstairs) into thinking you have protection from ground faults along with a 3 wire system then one day your tv/stereo/computer/refrigerator gets fried and you wonder why. The only way you can do it pursuant to the NEC is to use a GFCI receptacle and then put on the sticker that comes in the box that says no equipment ground. The GFCI will look for a differential between the hot and neutral which gives a little protection but you need an equipment grounding wire that goes all the way to the house ground for the best protection.
On price your electrical contractor bids will tell you. It is hard to say without knowing even the size of house or type of wall or where you are at. Look for a price from 3000 to 10000 bucks depending upon what you do and what is needed for a service entrance. I would expect some wall damage and especially for new outlets and retrofitting new wire. It's hard to say without seeing it and drilling some holes. It would help to have an unfinished basement and attic over one story to minimize any wall damage. Good luck.