Which of these statements necessarily violates the sunk cost principle? For each

Question

Which of these statements necessarily violates the sunk cost principle? For each of the four statements, explain why they do or do not violate the sunk cost principle.

a. Abigail pays a $30 entry fee to join a book club. After attending 3 of the 10 sessions, Abigail feels that the book club is not fun at all. She decides to attend the remaining 7 sessions because of the $30 entry fee.

b. After observing how financial stocks performed last week, I will sell all of my shares of Bank of Amerigo next week.

c. I will buy a $1 book that I would not otherwise want in order to make my online purchase exceed $25. That way, I can save $5 on shipping fees I would otherwise pay.

d. I would have paid $30 for a ticket if it all went to the venue, but I won’t pay it knowing Ticketbuster gets most of the money in fees.

Explanation / Answer

(a) Since the entry fee paid is a sunk cost and cannot be recovered whether Abigail attends further sessions or not, the entry fee is not relevant for decision making purposes and this violates the principle of sunk cost.

(b) This does not include any sunk cost and therefore there is no violation.

(c) Since the additional $1 will result in a savings of $5 on shipping, there is an incremental gain of $4 (= $5 - $1) and no sunk cost exists, rendering no violation.

(d) The $30 ticket price I will pay is an incremental cost and not a sunk cost that has already been paid, so there is no violation.

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