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Chapter 10: Problem 8

Someone who owns a townhouse wrote to a real estate advice columnist to ask whether he should sell his townhouse or wait and sell it in the future, when he hoped that prices would be higher. The columnist replied: "Ask yourself: Would you buy this townhouse today as an investment? Because every day you don't sell it, you're buying it." Do you agree with the columnist? In what sense are you buying something if you don't sell it? Should the owner's decision about whether to sell depend on what price he originally paid for the townhouse?

Short Answer

Expert verified
Agreeing with the columnist depends on personal economics views. 'Buying by not selling' refers to the opportunity cost of not selling today and potential gains that could be achieved. The owner's decision to sell should not depend on the original purchase price - as it is a sunk cost - rather on the present and future projected value of the house.

Step by step solution

01

Understand the Concept 'Buying by Not Selling'

The columnist's advice implies that by not selling the townhouse today, the current owner is essentially 'buying' it for today's market price, because they are losing out on the opportunity to profit from the sale. This concept is based on the economic principle of 'opportunity cost' - the cost of forgoing the next best alternative.
02

Assess the Relevance of the Original Purchase Price

Whether the owner's decision to sell should depend on the original purchase price ties into another economic concept: the 'sunk cost fallacy'. This is the tendency for individuals to consider sunk (irrecoverable) costs in decision making, even though these costs should not factor into the decision. In this context, the original purchase price is a sunk cost; it has already been paid, regardless of whether the owner sells or keeps the townhouse. The decision to sell should be based on the current market price and future price projections, not the price that was originally paid.
03

Evaluate the Agreement with the Columnist

Whether one agrees with the columnist largely depends on their understanding and acceptance of these economic principles. People who heavily consider opportunity cost in their decision making might agree with the columnist's viewpoint. On the other hand, those who are more sentimental or wish to minimize risk might choose to hold onto the townhouse, especially if they believe it will appreciate in value.

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Most popular questions from this chapter

In a forbes.com column, Patrick Rishe, an economist at Washington University, noted that in recent years, the National Football League has significantly expanded the number of games it broadcasts. As a result, he argued: "The NFL has oversaturated the market with its product.... TV ratings, consequently, have fallen. At least in part, diminishing marginal utility is a likely explanation as to why." Briefly explain his reasoning.

Marty and Ann discussed the rule of equal marginal utility per dollar spent, a topic that was recently covered in the economics course they were both taking: Marty: "When I use my calculator to divide the marginal utility of pizza by a price of zero, I don'\operatorname{tg} e t ~ a n ~ a n s w e r . ~ This result must mean that if pizza were being sold for a price of zero, the quantity demanded would be infinite." Ann: "Marty, that can't be true. No producer would be willing to 'sell' pizza, or any other product, for a zero price. Quantity demanded cannot be infinite, so zero prices cannot appear on demand curves and demand schedules." Suppose that Marty and Ann ask you for advice in resolving their disagreement. What would you tell them?

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