Why should sunk costs be ignored when making economic decisions in order to maximize or minimize...

Why should sunk costs be ignored when making economic decisions in order to maximize or minimize things such as utility, profits, total cost, time, etc?

Does the law of diminishing marginal utility hold true in every situation? Is it possible to think of any goods for which consuming additional units, at least initially, will result in increasing marginal utility? Why or why not?

Explain why the marginal cost curve intersects the average total cost curve at the level of output where the average total cost is at a minimum.

Expert Solution

1. Ans: The sunk cost is the cost, which already been spent and can't be recovered. Now if we are going to take any economic decision then that will be related to the future and that also depends on the past investment which may give some profit in the future. Now sunk cost is an irrelevant cost to include as it is already happening and there is no addition from this cost. The sunk cost has no impact on profit maximization or minimization as it has happened in the past and there is no. the effect left over. in case of utility we didn't get any utility so that is zero, the total cost present can't add it as it has no linkage present cost calculation.

2. The diminishing marginal utility is only applicable to two major types of goods that are normal and superior good. but among another verity like luxury goods, Veblen goods, and knowledge this law of diminishing marginal utility does not apply. for example how much we purchase gold or diamond we never feel the value or the desire for that product is decreasing.

If the law of diminishing marginal utility is not applicable to a case then it may be a constant marginal utility, which means the utility derived from that will constant. but it may not increase as we consume more and more. In general, sense when we consume more then it is sure that the utility derived from each additional unit will be less than the previous one. but in the only case of knowledge, it shows an increasing return . as much as we study we will get more from additional knowledge.

3. When MC is downward it is faster then AVC and pulls the AVC down but once it intersects AVC from its minimum it will push the average cost up at that minimum point AVC=MC.MC is the cost of the next unit produced so when it is intersecting below of AVC.In the case of productivity, it will represent the mirror image of AVC and MC as ATR and MP.

Rahul Sunny answered 2 years ago

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Why should sunk costs be ignored when making economic decisions in order to maximize or minimize...

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