1. 1 Sunk Cost and Marginal Cost An Auction Experiment

2. 2 Sunk Cost & Marginal Cost What do you know about Sunk Cost and Marginal Cost? ?

3. 3 Sunk Cost & Marginal Cost Sunk cost is the cost of a past act - it is irrelevant to (and should have no influence on) any production decisions made at present or in future

4. 4 Sunk Cost & Marginal Cost Marginal Cost is the change in total cost for producing an additional unit of output

5. 5 Sunk Cost & Marginal Cost What do they mean actually? It will be demonstrated by an Auction Experiment.

6. 6 Auction Experiment Teacher will be the auctioneer and you all will be the bidders. At least two $50 bills will be auctioned If you want to bid, you have to raise your numbered paper plate. The base price is $0.5 and every bid will be in a minimum of $0.5.

7. 7 Auction Experiment If you are not interested in the auction, may I invite you to keep the records for the auction. The one who can pay the highest price will get the $50 bill, but the winning bidder is not the only bidder who pays for the dollar.

8. 8 Auction Experiment At the end of the auction, all bidders who entered a bid during the auction must pay an amount equal to their highest bid. Since this is a serious auction, you can ’ t talk to your fellow classmates until the end of all auctions.

9. 9 Auction Experiment How does the auction experiment tells us about the difference between Sunk Cost and Marginal Cost?

10. 10 Auction Experiment It seems that the auction can never stop once more than 2 people involve in the auction If you stop bidding, the money you have to pay at the end of the auction will become the Sunk Cost. (remember the definition of Sunk Cost?)

11. 11 Auction Experiment So what is the Marginal Cost in the auction experiment? Yes you are right!!

12. 12 Auction Experiment The extra $0.5 you paid for the next bid is becoming the Marginal Cost. Now can you raise some daily examples about Sunk Cost and Marginal Cost?

13. 13 Video

14. 14 Video What is the sunk cost and marginal cost in this case? (Answers: The $5 coin I first paid is the sunk while the other $0.5 coin is the marginal cost.)

15. 15 Examples The Hang Send Index dropped from 16820 to 6544. An investor said, “ I won ’ t sell my shares, as long as I hold my shares, I lose nothing. If I sell them at such a low price, I lost a lot. ”

16. 16 Examples You have waited the bus #11 for 30 minutes and decided not to wait anymore. Therefore you take the taxi finally, but you found that the bus #11 is following your taxi. Question: What are the sunk cost and marginal cost involved here?

17. 17 If you want to know more Mateer, G.Drik (1997): “ Selling Seats Through An English Auction, ” Classroom Expernomics, Volume 6, Number 2 (Fall 1997). [Also available online from http://www.marietta.edu/~delemeeg/expernom.html] http://www.marietta.edu/~delemeeg/expernom.html Online slide show http://www.valdosta.edu/~kroland/sld001.htm