Suppose you wish to sell your old car. The car is worthless to you, but you expe

Question

Suppose you wish to sell your old car. The car is worthless to you, but you expect it will sell for $1000 if you aggressively advertise. You spend $500 on advertisement in a local newspaper (Gainesville Times (Links to an external site.)Links to an external site.). The car does not sell. One day you tell your sad story to your friend. He says to you, “I know why your car didn’t sell. You advertized in the wrong news paper. If you run the same number of ads in the Tradin' Post Buyer's Guide (Links to an external site.)Links to an external site., I guarantee (if it does not sell he has to pay you $1000) it will sell for $1000!” You say to your friend, “Great, thanks for the advice. By the way, what it cost me to run the same number of ads in the Tradin' Post Buyer's Guide (Links to an external site.)Links to an external site.?” He answers, “$800” Should you advertise you car again? Explain your answer with sufficient detail as to why you make the economic decision. I encourage you to apply the concepts of marginal analysis, cost-benefit, and sunk cost in your analysis.

Explanation / Answer

Here the value of the car to me is 0 but by selling I wish to make 1000 $ . Advertisement costs are sunk costs since they cannot be recovered . Already I have spent 500$ on advertisement . Now if I spent 800$ more then total cost would be 1300 $ . But since the 500 spent earlier is a sunk cost , it is not relevant to future decisions . In the future we will consider cost to be only 800$ .

Now comes the benefit from advertising . If my car gets sold I get 1000$ which is beneficial ( profit of 200$ ) . But even if the car does not sell then the friend who gave the advice pays 1000$ (if it does not sell he has to pay you $1000) . So either way I will be profitable . Hence I will advertise again .

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