You have rented your first apartment, signing a lease that commits you to pay $5

Question

You have rented your first apartment, signing a lease that commits you to pay $500 each month for 12 months. You have an opportunity to take a trip to Europe during the entire month of June and you will spend $2,000 traveling. Your apartment will be vacant, but because of your lease, you must pay the rent. The cost of taking the trip to Europe is:

a. $2,000, because the $500 for your June rent is a sunk cost

b. $2,500, because this is your total spending during the month of June

c. $1,500, because the June rent is an opportunity cost of traveling that must be deducted from the explicit cost of the trip.

d. $2,500, because the June rent is an opportunity cost of traveling and must be added to the explicit cost of the trip

Explanation / Answer

The correct answer for this question is option A.

Note that that $500 is not an opportunity cost of travelling. If you are not travelling then you cannot recover this $500 which means this becomes the sunk cost. You are paying $500 whether you live in the apartment or not and you cannot recover it which means it will have to be paid and so it is a sunk cost. Suncoast are not considered in decision making so we avoid sunk cost and this makes the total cost of the trip to be $2,000.

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