Question

. Using the concepts of opportunity cost, marginal analysis and sunk cost what advice would you give the following people: (3 points)

A) Dani loves to eat at the buffet at the casino. She gorges herself so that she is sick for the next two days. She says she does it because it doesn’t cost her anything extra? Your advice?

B) Layne works for a surveying company that spends $20k on surveys to decide whether or not to launch a new product or service. Then the company decides it needs to launch the product or service to earn back the monies spent on the survey. Your advice?

C) Andrea decides her favorite food is In-N-Out Double Double cheeseburgers, therefore, she decides that she will eat nothing but Double Doubles from here on out. Your advice?

D) A student has a car to sell. The student spent $500 on tires in the last year. The student could sell the car for $3000, however, if the student upgraded the car stereo he could sell the car for $3,500. The upgrade would cost $350. Should the student sell the car as is, or upgrade the stereo?

E) Brandy is at a vacation resort in San Diego where a kayaking trip in the harbor was included in the price for the room. Brandy is deathly afraid of kayaking in the ocean because she gets sick. But she thinks because she has paid for it, she should go kayaking. Your advice?

Answer 1

A. Danny should stop doing it because even though it doesn't cost her anything extra, she syill has the opportunity cost of time. The 2 sick days could have been utilized in a better way had she been healthy. So there is always the opportunity cost of time.

B. $20k are sunk cost which cannot be recovered irrespective of whether the company launches new products or not. So the company should not base their decision on the $20k spent.

C. Andrea should not eat only cheese burger even though she like it. We should base our decision on Marginal analysis where we decide on any action by doing it a little less or a little more instead of deciding to consume only burger and nothing else.

This way she can find the optimal level of burger consumption which will maximize her utility.

D. $500 spent on tires is a sunk cost which he is not getting back.

If he spends $350 on upgrade he can earn $500 it means a profit of $150. so the student should make such an investment and should upgrade.

e. I think she should not go for kayaking as she already knows that she will get sick. The price of hotel is already paid and is a sunk cost. So there is no way to base your decision on it. so she should not go for kayaking.