Jason Spends All Afternoon Baking a Cake

question 56

Multiple Choice

Jason spends all afternoon baking a cake. When it comes out of the oven, it's burnt and sunk in the middle. Jason thinks about all the time he invested in making the cake and decides to frost and eat it anyway, even though it tastes pretty terrible. Jason's decision to decorate and eat the cake is an example of:

• A)focusing on sunk costs.
• B)ignoring sunk costs.
• C)thinking marginally.
• D)weighing the opportunity costs of frosting and eating the cake against the benefits of doing so.

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Definitions:

Call Option

A financial contract that gives the holder the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specific price within a specified time frame.

Strike Price

The specified price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset.

Stock Beta

A measure of a stock's volatility in relation to the overall market; reflects the risk associated with a specific stock.

Time to Maturity

The duration left until the final payment date of a financial instrument, critical for assessing its risk and return.