HUMework Practice Assignment 4 Graded Assignment | Back to Assignment Attempts 1

Question

HUMework Practice Assignment 4 Graded Assignment | Back to Assignment Attempts 17. Sunk costs and decision making Tim has plans to go to an opera and already has a $100 nonrefundable, nonexchangeable, and nontransferable ticket. Now Alyssa, whom Tim has wanted to date for a long time, asks him to a party. Tim would prefer to go to the party with Alyssa and forgo the opera, but he doesn't want to waste the $100 he spent on the opera ticket. From the perspective of an economist, if Tim decides to go to the opera, what has he just done? Correctly ignored a sunk cost Incorrectly allowed a sunk cost to influence his decision

Explanation / Answer

Sunk Cost refers to that cost which has already been incurred by a firm and cannot be recovered and is independent of the future costs which the firm may incur in the coming future. In relation with decision making, sunk costs can be ignored fully as sunk cost has nothing to do with the future, since decision making is the main thing for future outcomes.

Here in the given question, Tim prefers to go on a date and at the same time also does not want to forgo the cost he has to bear for buying the opera ticket. So here, $100 is reffered to as the sunk cost for Tim. Now, if Tim decides to go to the opera, he is allowing the sunk cost to influence his decision as his preference is to go on a date but he could'nt as he dont want to waste the sunk cost he had to bear. If he would'nt have paid $100 for buying the ticket earlier, then while making the decision, he would have opted to go on a date instead of going to the opera.

So, the correct answer to the given question is:

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