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:

Life Insurance Contract

An agreement in which an insurer promises to pay a designated beneficiary a sum of money upon the insured person's death, in exchange for premiums paid by the policyholder.

Insurer's Risks

The potential for financial loss that an insurance company agrees to cover under the terms of an insurance policy.

Insurance Broker

A professional intermediary who acts on behalf of clients to find and arrange appropriate insurance coverage from insurers.

Independent Contractor

is an individual who provides services to another entity under terms specified in a contract or agreement, without being legally considered an employee.