Standard Economic Theory Asserts That Sunk Costs Are Irrelevant in Making

question 181

Multiple Choice

Standard economic theory asserts that sunk costs are irrelevant in making economic decisions, yet studies conducted by behavioural 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 maximise 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.

---

Definitions:

Retired

Pertains to assets that have been removed from operational use, often due to age or obsolescence.

Unamortized Premium

The portion of a bond premium that has not yet been amortized or expensed over the bond's life, reflecting the difference between the bond's face value and its higher purchase price.

Bondholders

Bondholders are investors or entities that hold bond investments, and thus are creditors to the issuer of the bond, entitled to interest payments and repayment of principal.

Gain or Loss

This refers to the financial result that occurs when the selling price of an asset differs from its original purchase price, either higher (gain) or lower (loss).