Suppose a Builder Constructs a House That He Hopes to Sell

question 80

Multiple Choice

Suppose a builder constructs a house that he hopes to sell to a prospective future buyer before he finishes building it.After spending six months and $300,000 in acquiring the land and constructing the house,market conditions change and the builder fails to find a buyer willing to pay his asking price of $360,000.The builder further realizes that by investing $300,000 in a bank deposit he would have been able to earn $4,500 as interest.Which of the following is the economically efficient way for the builder to view his investment?

• A)The $300,000 is a sunk cost and should be ignored when negotiating a price for the home.
• B)The $300,000 is the builder's opportunity cost and he should not accept any offer below that.
• C)He should advertise more heavily in an attempt to sell the home for at least $300,000.
• D)He should raise the price even further to better reflect the additional opportunity costs of his time and capital expenditures.

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Definitions:

Robnett and Anderson

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