Mr. Johnson would like to open a new business for which he needs a license from

Question

Mr. Johnson would like to open a new business for which he needs a license from the city of Atlanta for $25,000. The license is refundable, but only $5,000 is refundable in the event that the firm does not use the license within 3 days. What is the firm's fixed cost? What arc the firm's sunk cost? Suppose Mr. Johnson obtains the license but does not use it. Two days after signing the lease, Mr. James, another business tycoon offers Mr. Johnson $4,000 for the license. Should Mr. Johnson accept the offer? Why?

Explanation / Answer

(a) Fixed costs are 25000 which he needs for license

(b) Sunk costs are zero

(c) If Mr Johnson does not use the license he will be refunded 5000 which is more than 4000 offered by Mr James. The offer should not be accepted.

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