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Chapter 9: Problem 3

Suppose you have just paid a nonrefundable fee of \(\$ 1,000\) for your meal plan for this academic term. This allows you to eat dinner in the cafeteria every evening. a. You are offered a part-time job in a restaurant where you can eat for free each evening. Your parents say that you should eat dinner in the cafeteria anyway, since you have already paid for those meals. Are your parents right? Explain why or why not. b. You are offered a part-time job in a different restaurant where, rather than being able to eat for free, you receive only a large discount on your meals. Each meal there will cost you \(\$ 2\); if you eat there each evening this semester, it will add up to \(\$ 200\). Your roommate says that you should eat in the restaurant since it costs less than the \(\$ 1,000\) that you paid for the meal plan. Is your roommate right? Explain why or why not.

Short Answer

Expert verified
#Answer# Based on the sunk cost concept, the nonrefundable meal plan should not affect the decision to eat at the cafeteria after being offered a part-time job with free meals. The opportunity to eat for free at the restaurant is a benefit of the job and shouldn't be influenced by the sunk cost of the meal plan. Similarly, the decision to eat at the discounted restaurant should not be solely based on comparing the costs of $200 and $1,000. Students should consider factors such as preferences, convenience, and meal quality without considering the already-paid meal plan cost in their decision-making process.

Step by step solution

01

Understand the concept of sunk costs

A sunk cost is a cost that has already been incurred and cannot be recovered. In this exercise, the nonrefundable fee of $1,000 for the meal plan is a sunk cost. Sunk costs should not influence any future decisions because they are already paid, and they cannot be changed.
02

Analyze part (a) using the concept of sunk costs

The parents' advice to eat in the cafeteria because the meal plan has already been paid for is not correct. Since the meal plan is a sunk cost, it should not affect the decision on where to eat dinner after being offered a part-time job with free meals. The opportunity to eat for free at the restaurant should be considered a benefit of the job and not be influenced by the sunk cost of the meal plan.
03

Analyze part (b) using cost comparison and concept of sunk costs

The roommate's advice to eat in the other restaurant where each meal costs \(2, resulting in a \)200 additional expense for the semester, is also not necessarily correct. Although the discounted meals may appear to be a better option than the \(1,000 meal plan, the sunk cost concept should also be applied in this situation. The decision of whether to eat at the \)2-meal restaurant should not be solely based on the comparison of \(200 vs. \)1,000, as the nonrefundable fee of \(1,000 has already been paid. Instead, the decision should be based on a comparison between the \)200 additional cost for the discounted meals and the effectiveness of eating at the cafeteria for free this semester (given the already-paid meal plan). Factors such as preferences, convenience, and the quality of meals should be considered in making the decision.
04

Conclusion

In both cases, decisions should not be influenced by the sunk cost of the meal plan. Instead, students should weigh the benefits of the respective job offers and determine the best option without considering the prepaid meal plan cost. The concept of sunk costs is essential to making accurate and relevant decisions, especially in financial matters.

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Most popular questions from this chapter

Amy, Bill, and Carla all mow lawns for money. Each of them operates a different lawn mower. The accompanying table shows the total cost to Amy, Bill, and Carla of mowing lawns. $$ \begin{array}{cccc} \begin{array}{c} \text { Quantity of } \\\ \text { lawns mowed } \end{array} & \begin{array}{c} \text { Amy's } \\\ \text { total cost } \end{array} & \begin{array}{c} \text { Bill's } \\\ \text { total cost } \end{array} & \begin{array}{c} \text { Carla's } \\\ \text { total cost } \end{array} \\\ 0 & \$ 0 & \$ 0 & \$ 0 \\\ 1 & 20 & 10 & 2 \\\ 2 & 35 & 20 & 7 \\\ 3 & 45 & 30 & 17 \\\ 4 & 50 & 40 & 32 \\\ 5 & 52 & 50 & 52 \\\ 6 & 53 & 60 & 82 \end{array} $$ a. Calculate Amy's, Bill's, and Carla's marginal costs, and draw each of their marginal cost curves. b. Who has increasing marginal cost, who has decreasing marginal cost, and who has constant marginal cost?

The Centers for Disease Control and Prevention (CDC) recommended against vaccinating the whole population against the smallpox virus because the vaccination has undesirable, and sometimes fatal, side effects. Suppose the accompanying table gives the data that are available about the effects of a smallpox vaccination program. $$ \begin{array}{ccc} \begin{array}{c} \text { Percent of } \\\ \text { population } \\\ \text { vaccinated } \end{array} & \begin{array}{c} \text { Deaths due to } \\\ \text { smallpox } \end{array} & \begin{array}{c} \text { Deaths due to } \\\ \text { vaccination side } \\\ \text { effects } \end{array} \\ \hline 0 \% & 200 & 0 \\\ 10 & 180 & 4 \\\ 20 & 160 & 10 \\\ 30 & 140 & 18 \\\ 40 & 120 & 33 \\\ 50 & 100 & 50 \\\ 60 & 80 & 74 \\ \hline \end{array} $$ a. Calculate the marginal benefit (in terms of lives saved) and the marginal cost (in terms of lives lost) of each \(10 \%\) increment of smallpox vaccination. Calculate the net increase in human lives for each \(10 \%\) increment in population vaccinated. b. Using marginal analysis, determine the optimal percentage of the population that should be vaccinated.

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