You are selling your 1996 Mustang. You have already spent $1000 on repairs. At t

Question

You are selling your 1996 Mustang. You have already spent $1000 on repairs.

At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.”

In each of the following scenarios, should you have the transmission repaired? Explain your thoughts in either case by posting a comment or a response to a comment.

A.    Blue book value (what you could get for the car) is $6500 if transmission works, $5700 if it doesn’t.

B.    Blue book value is $6000 if transmission works, $5500 if it doesn’t.

Next, provide an example of a real life trade off that you might have faced and try to put some dollar numbers to measure the costs and benefits of the tradeoff.

Explanation / Answer

In the first scenario what we will receive if the transmission works is $6,500 and if it doesn't then our expected price Falls by $800. This can be seen from this perspective that if the transmission works we can earn $800 additionally. The transmission has a cost of $600 so we are in a position of earning a profit of $200 if we repair the transmission. Hence the first scenario has an incentive to repair the transmission.

In the second scenario the price will rise by $500 only which will not compensate for the cost incurred in transmission repairing. Therefore in this case transmission should not be repaired.

Students face the most trade-offs when they compare the study time on one subject and the required a study time on the other. The more time you spend on one particular subject the last time you will have for studying other. College degree is very important for having a higher earnings in later part of the life. A trade-off between entering the labour force now without a College degree and entering the labour force 4 years later with a College degree has a comparison of income that is earned in both the cases. Earning without a College degree can be as high as $18,000 and Earning with a College degree can reach $25,000. So you lose $7,000 in trade off if you go to the labour market without having a degree. This difference however does not include the opportunity cost of going to college.

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