Standard Economic Theory Asserts That Sunk Costs Are Irrelevant in Making

question 52

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, they have 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:

Equity

Refers to fairness and justice in the distribution of resources and opportunities.

Fairness

The quality of treating others equitably, without favoritism or discrimination, often applied in legal, social, and economic contexts.

Equity

The ownership interest held by shareholders in a corporation, represented by their shares of stock.

Proportional

A relationship between two quantities where they increase or decrease at the same rate.