You have just purchased a new Ford Taurus for $20,000, but the most you could ge

Question

You have just purchased a new Ford Taurus for $20,000, but the most you could get for it if you sold it privately is $15,000. Now you learn that Toyota is offering its Camry, which normally sells for $25,000, at a special sale price of $20,000. If you had known before buying the Taurus that you could buy a Camry at the same price, you would have definitely chosen the Camry. Is this True or False? From what we are told of your preferences, it follows that if you are a rational utility maximizer, you should definitely not sell the Taurus and buy the Camry. Explain why this is the case.

Explanation / Answer

In this case, this is true for the rational consumer. His marginal utility in this case is maximized with the camry and not the taurus. Additionally, the marginal benefits of the camry exceed that of the taurus. Since he already has the taurus, the extra cost is sunk, and he should now stay with the taurus because the marginal cost is too high. Hope this helps

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