Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making? I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition."
II) "To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account."
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question

Quizplus · Accepted Answer

Statement II demonstrates an understanding of sunk costs by recognizing that the $10M spent on creating a unique image for the new soap is a cost that cannot be recovered even if the project is abandoned. Therefore, it must be taken into account when making the decision to develop the new soap. Statement I does not demonstrate an understanding of sunk costs, as the money spent on MBA classes is a sunk cost that should not be considered in the decision to continue or quit.

Which of the Following Statements Demonstrates an Understanding of the Importance