Chapter 10R, Problem 20MCQ

To determine

The correct option for given situation where firm is making production decision.

Answer to Problem 20MCQ

Option e is correct.

Explanation of Solution

Explanation for correct option:

e.

Sunk cost refers to the cost that is the cost which is already incurred and it cannot be changed or reduced in future. The cost is irrespective of future business activities. In making production decision, firm should ignore the sunk cost. Therefore, option e is correct.

Explanation for incorrect options:

a.

Since sunk cost cannot be recovered and it is irrelevant to consider in making future business decisions, it cannot be set equal to variable cost. Therefore, option a is incorrect.

b.

Sunk cost is already incurred and cannot be set equal to marginal cost as it will remain same. Therefore, option b is incorrect.

c.

While computing total cost of production, firm should consider the relevant cost instead of sunk cost as it has been spent already. Therefore, option c is incorrect.

d.

The cost that is incurred once will not be recovered in future is termed as sunk cost. Therefore, it should not be considered while making future business decisions, option d is also incorrect.

Economics Concept Introduction

Sunk cost: Sunk cost refers to the cost that has been already incurred and it cannot be recovered or the amount remains the same irrespective of future business activities.