Whether or not costs are “sunk,” meaning irrelevant, depends on the nature of the decision being made. For example, if a landlord owns an apartment building, it does not matter what it cost him to construct it: he should maximize marginal revenues less marginal costs. The market dictates the price he can rent it at. His construction costs may determine what he would like to rent it at, but they are sunk once he has built it. However, if he is deciding whether to build an apartment building, i.e., making a long-term investment decision, not a short-term pricing decision, the costs of construction are certainly not sunk, they are quite relevant.
Peter From: [email protected] [mailto:[email protected]] On Behalf Of Max B. Sawicky Sent: Thursday, September 03, 2009 9:08 AM To: [email protected] Subject: Re: Re: [Pen-l] Presumed "irrevelence of sunk costs" But there is all the lit on cost of capital, rules for decisions on financing capital expenditures, optimal investment, etc etc. Sep 3, 2009 08:48:55 AM, [email protected] wrote: =========================================== On Sep 3, 2009, at 8:30 AM, Ann Davis wrote: > Beginning principles of micro one more time............the focus on > marginal costs and marginal benefits, ignoring sunk costs, seems to > make very clear how micro is simply ignoring the problem of > capital. If capital investment can be interpreted as "sunk costs," > it is "irrelevant." Mainstream economics has left this question > entirely to "finance" and to accounting, it seems. According to the standard finance text I have lurking on some bookshelf somewhere, you should ignore sunk costs in evaluating a project's continued viability. So even finance isn't interested in the question! Doug _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
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