Cost and Choice Prof. Barry Brownstein. Sunk Costs l Lobster dinner example l sunk costs are irrelevant, they are no cost at all because they represent.

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Presentation transcript:

Cost and Choice Prof. Barry Brownstein

Sunk Costs l Lobster dinner example l sunk costs are irrelevant, they are no cost at all because they represent no opportunity for choice l the proper stance for making cost calculations is not looking back to the past but looking forward to the future

Marginal vs. Average Costs l Marginal costs are the anticipated costs of the decision –it could be the cost of an additional unit –it could be the cost of an additional batch l Average costs are the total costs divided by the number of units

True or False? l I have to keep driving my car to make up for the loss I took when I fixed the transmission l A company will never sell a product below cost

Problem 1 l If the firm for which you work pays you 20 cents for every mile you drive your own car on company business, should you use your own car or a company car? Which of the followings costs are relevant? –Purchase price of your car –vehicle license fee –insurance –depreciation –gasoline

Problem 2 l In order to decide whether or not to drop intercollegiate football, your school undertakes a study of the program's cost. Which of the following are genuine costs? –Tuition scholarships to players –the stadium mortgage –free tickets to full-time students –the salary of the athletic director, ticket manager and trainer

Problem 3 You are considering opening a ski resort land= $200,000 ski lift=100,000 shelter= 20,000 operate the lift= $50 per hour You plan on borrowing $320,000 and will have loan payments of $43,000. You plan on being open a 1000 hours. First year revenue is only $60,000. Should you close?

Fair or Unfair? l A grocery store has several month’s supply of peanut butter in stock which it has on its shelves and in the storeroom. The owner hears that the wholesale price of peanut butter has increased and immediately raises the price on the current stock of peanut butter.