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Economics: Sunk Costs and Utility

1. People join tennis clubs for a fixed fee per year, which entitles them to play as much as they want without charge. Because people who pay these fees play more tennis than others (who can use free public courts), this means sunk costs matter for decisions. True or False?

2. When discussing the maximization of utility, regardless of whether you chose to work more hours or fewer when offered a higher hourly wage, you could not be worse off than you were at a lower hourly wage. Explain.

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Question one:

Sunk costs are costs which have already been incurred and cannot be recovered at any instance. These costs differ from any other costs that a business may incur in future such as research and development expenses or inventory costs because they are costs which have already been incurred. These costs are independent of any event which may occur at a future date. Individuals or business organizations always take into consideration future costs which are likely to be incurred through following an identified strategy.

A fixed fee, similar to a flat rate is a cost which remains constant with the increase or decrease in the amount goods and services which are produced. This means that the expenses which are associated to the fixed costs have to be paid by a company while the activity that the business is involved in remains to be independent. Sunk costs are not considered as relevant during the act of making decisions. 'sunk cost fallacy' is a situation whereby an individual ...

Solution Summary

This solution discusses the questions regarding sunk costs and utility in 645 words. Two references are provided.