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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

You have bought a \(\$ 10\) ticket in advance for the college soccer game, a ticket that cannot be resold. You know that going to the soccer game will give you a benefit equal to \(\$ 20\). After you have bought the ticket, you hear that there will be a professional baseball post-season game at the same time. Tickets to the baseball game cost \(\$ 20\), and you know that going to the baseball game will give you a benefit equal to \(\$ 35\). You tell your friends the following: "If I had known about the baseball game before buying the ticket to the soccer game, I would have gone to the baseball game instead. But now that I already have the ticket to the soccer game, it's better for me to just go to the soccer game." Are you making the correct decision? Justify your answer by calculating the benefits and costs of your decision.

Hiro owns and operates a small business that provides economic consulting services. During the year he spends \(\$ 57,000\) on travel to clients and other expenses. In addition, he owns a computer that he uses for business. If he didn't use the computer, he could sell it and earn yearly interest of \(\$ 100\) on the money created through this sale. Hiro's total revenue for the year is \(\$ 100,000\). Instead of working as a consultant for the year, he could teach economics at a small local college and make a salary of \(\$ 50,000\). a. What is Hiro's accounting profit? b. What is Hiro's economic profit? c. Should Hiro continue working as a consultant, or should he teach economics instead?

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?

You own and operate a bike store. Each year, you receive revenue of $\$ 200,000\( from your bike sales, and it costs you \)\$ 100,000$ to obtain the bikes. In addition, you pay \(\$ 20,000\) for electricity, taxes, and other expenses per year. Instead of running the bike store, you could become an accountant and receive a yearly salary of \(\$ 40,000\). A large clothing retail chain wants to expand and offers to rent the store from you for \(\$ 50,000\) per year. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store?

In each of the following examples, explain whether the decision is rational or irrational. Describe the type of behavior exhibited. a. Kookie's best friend likes to give her gift cards that Kookie can use at her favorite stores. Kookie, however, often forgets to use the cards before their expiration date or loses them. Kookie, though, is careful with her own cash. b. In 2010 , the Panera Bread company opened a store in Clayton, Missouri, that allowed customers to pay any amount they like for their orders; instead of prices, the store listed suggested donations based on the cost of the goods. All profits went to a charitable foundation set up by Panera. In \(2011,\) the store was pleased with the success of the program. c. Rick has just gotten his teaching degree and has two job offers. One job, replacing a teacher who has gone on leave, will last only two years. It is at a prestigious high school, and he will be paid \(\$ 35,000\) per year. He thinks he will probably be able to find another good job in the area after the two years are up but isn't sure. The other job, also at a high school, pays $\$ 25,000$ per year and is virtually guaranteed for five years; after those five years, he will be evaluated for a permanent teaching position at the school. About \(75 \%\) of the teachers who start at the school are hired for permanent positions. Rick takes the five-year position at \(\$ 25,000\) per year. d. Kimora has planned a trip to Florida during spring break in March. She has several school projects due after her return. Rather than do them in February, she figures she can take her books with her to Florida and complete her projects there. e. Sahir overpaid when buying a used car that has turned out to be a lemon. He could sell it for parts, but instead he lets it sit in his garage and deteriorate. f. Barry considers himself an excellent investor in stocks. He selects new stocks by finding ones with characteristics similar to those of his previous winning stocks. He chocks up losing trades to ups and downs in the macroeconomy.
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