Standard Economic Theory Asserts That Sunk Costs Are Irrelevant in Making

question 240

Multiple Choice

Standard economic theory asserts that sunk costs are irrelevant in making economic decisions, yet studies conducted by behavioral economists reveal that sunk costs often affect economic decisions.Which of the following could explain this observation?

• A)People measure the value of a good in terms of its purchase price.
• B)Even though sunk costs cannot be recovered, it has been incurred and therefore should be treated as part of the product's value.
• C)If consumers maximize their utility, it makes sense to consider the full purchase price of a product in their consumption decisions.
• D)Sunk costs have a higher opportunity cost than costs that can be recovered.

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Definitions:

Credit Side

The right side of an accounting ledger where increases in liabilities, equity, and revenue accounts are recorded.

Debit Side

The left side of a ledger account that records increases in assets and expenses or decreases in liabilities and equity.

Journalizing

A process in accounting that involves recording transactions in a journal before they are transferred to a ledger.

Posting Process

The act of transferring entries from a company's journal to the appropriate accounts in the general ledger.