A local restaurateur who had been running a profitable business for many years recently purchased a three-way liquor license. This license gives the owner the legal right to sell beer, wine, and spirits in her restaurant. The cost of obtaining the three-way license was about $90,000, since only 300 such licenses are issued by the state. While the license is transferable, only $75,000 is refundable if the owner chooses not to use the license. After selling alcoholic beverages for about one year, the restaurateur came to the realization that she was losing dinner customers and that her profitable restaurant was turning into a noisy, unprofitable bar. Subsequently, she spent about $8,000 placing advertisements in various newspapers and restaurant magazines across the state offering to sell the license for $80,000. After a long wait, she finally received one offer to purchase her license for $77,000. Was it sensible for the restaurateur to spend $8,000 in order to sell the license for $80,000? No - it is guaranteed to generate a loss. Yes - she was right to ask for more than $75,000 for the license. No - she should invest more in her advertising. Would you recommend that she accept the $77,000 offer? No - she clears only $69,000, which is worse than $75,000. Yes - the $8,000 is a sunk cost, so accepting this offer makes her better off.
A local restaurateur who had been running a profitable business for many years recently purchased a three-way liquor license. This license gives the owner the legal right to sell beer, wine, and spirits in her restaurant. The cost of obtaining the three-way license was about $90,000, since only 300 such licenses are issued by the state. While the license is transferable, only $75,000 is refundable if the owner chooses not to use the license. After selling alcoholic beverages for about one year, the restaurateur came to the realization that she was losing dinner customers and that her profitable restaurant was turning into a noisy, unprofitable bar. Subsequently, she spent about $8,000 placing advertisements in various newspapers and restaurant magazines across the state offering to sell the license for $80,000. After a long wait, she finally received one offer to purchase her license for $77,000. Was it sensible for the restaurateur to spend $8,000 in order to sell the license for $80,000? No - it is guaranteed to generate a loss. Yes - she was right to ask for more than $75,000 for the license. No - she should invest more in her advertising. Would you recommend that she accept the $77,000 offer? No - she clears only $69,000, which is worse than $75,000. Yes - the $8,000 is a sunk cost, so accepting this offer makes her better off.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A local restaurateur who had been running a profitable business for many years recently purchased a three-way liquor
license. This license gives the owner the legal right to sell beer, wine, and spirits in her restaurant. The cost of obtaining the
three-way license was about $90,000, since only 300 such licenses are issued by the state. While the license is
transferable, only $75,000 is refundable if the owner chooses not to use the license. After selling alcoholic beverages for
about one year, the restaurateur came to the realization that she was losing dinner customers and that her profitable
restaurant was turning into a noisy, unprofitable bar. Subsequently, she spent about $8,000 placing advertisements in
various newspapers and restaurant magazines across the state offering to sell the license for $80,000. After a long wait,
she finally received one offer to purchase her license for $77,000.
Was it sensible for the restaurateur to spend $8,000 in order to sell the license for $80,000?
No - it is guaranteed to generate a loss.
Yes - she was right to ask for more than $75,000 for the license.
No - she should invest more in her advertising.
Would you recommend that she accept the $77,000 offer?
No - she clears only $69,000, which is worse than $75,000.
Yes - the $8,000 is a sunk cost, so accepting this offer makes her better off.
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