Stan buys a 1966 Mustang with the intention of repairing, restoring and selling

Question

Stan buys a 1966 Mustang with the intention of repairing, restoring and selling it. He anticipates that it will cost him $10 000 to purchase, repair and restore the car, and that he can sell the finished car for $13 000. When he has spent a total of $10 000 on the project, he discovers that he needs to replace the engine. It will cost Stan $4000 to replace the engine. If he replaces the engine he can sell the car for $13 000. He can sell the car without the new engine for $9000. What should he do?

Explanation / Answer

Here, the marginal cost of completing the project, i.e., replacing the engine is $4,000 and the marginal benefit is $13,000. So, the net marginal benefit is $9,000 (i.e., $13,000 - $4,000). On the other hand, the marginal cost of stopping the project is zero and the marginal benefit is $9,000 (which he can get by selling the car without replacing the engine).So, the net marginal benefit is $9,000 (i.e., $9,000 - $0).

Thus, Stan is indifferent between these two situations.

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