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    Economic Costs vs. Accounting Costs

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    The following problem is proposed:

    World Airlines is thinking of buying a new plane for its shuttle service. Why does the economist's notion of cost suggest that World Airlines should consider the plane's price in deciding whether it is a profitable investment but that, once bought, the plane's price is not directly relevant to the airline's profit-maximizing decisions? In such a case of "sunk costs," which cost should be used for deciding where to use the plane?

    Here's my answer:

    The price of the airplane best expresses the opportunity cost, or the cost of goods that were given up to produce the airplane. World Airline's profit-maximizing decisions should be based on economic cost, or the cost required to keep the plane in its present use. In the case of "sunk costs," implicit cost or rather, the rental rate (v) should be used for deciding where to use the plane.

    Am I on the right track? Is my answer too general?

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    Solution Preview

    Your idea of comparing the profit of buying the plane vs. renting plane is absolutely correct. I would like to point out one more scenario.

    Consider this, if the airline buys a new plane, and the plane lasts for say 5 year. Every year, the plane will ...

    Solution Summary

    The solution discusses the economic costs vs. accounting costs.