Question

You have good tickets to a basketball game an hour's drive away. There's a blizzard raging outside, and the game is being televised. You can sit warm and safe at home and watch it on \(\mathrm{TV}\), or you can bundle up, dig out your car, and go to the game. What do you do? Source: Slate, September 9,2005 a. What type of cost is your expenditure on tickets? b. Why is the cost of the ticket irrelevant to your current decision about whether to stay at home or go to the game?

Short answer

a. Sunk cost. b. Irrelevant because it is a sunk cost and already incurred.

Step-by-step solution

Identify the Type of Cost

The cost of the tickets is referred to as a 'sunk cost'. Sunk costs are expenses that have already been incurred and cannot be recovered regardless of future actions.

Evaluate the Relevance of Sunk Costs

The cost of the ticket is irrelevant to your current decision because it is a sunk cost. Sunk costs should not influence your decision-making process. What matters now are the current and future costs and benefits of either going to the game or staying home.

Key concepts

sunk costs in decision-making

In decision-making, sunk costs are payments or expenses that have already been made and cannot be recovered. They are called 'sunk' because, like something that has sunk in the ocean, they are gone and irretrievable. When you are faced with a decision, such as whether to go to the basketball game during a blizzard or stay home, the price you previously paid for the tickets is a sunk cost. It has no bearing on the present situation because the money is already spent. Instead, focus on the current conditions and future outcomes to make your decision. For example, consider whether it's safe to drive and how much you value comfort versus attending the live game.

irrelevance of sunk costs

Sunk costs are irrelevant in decision-making because they do not change regardless of your future actions. The past expense cannot be recovered, so it should not influence your current or future decisions. In the given scenario, the cost of tickets is a sunk cost. Whether you decide to brave the blizzard and go to the game or stay home and watch it on TV, the money spent on tickets is lost. Therefore, it would be illogical to base your decision on the cost of the tickets. Instead, evaluate the immediate factors such as safety, convenience, and enjoyment. By doing so, you make a more rational choice unaffected by past, unrecoverable expenses.

decision-making in economics

In economics, decision-making involves choosing the best option based on the costs and benefits of available alternatives. Analytical decision-making requires ignoring sunk costs and focusing on current and future impacts. This principle helps in making efficient, rational choices. For instance, in the basketball game scenario, your decision should weigh the risks of driving in a blizzard and the comfort of staying home. Economists stress the importance of marginal costs and benefits, which are the additional costs and benefits of one more unit of something. Here, the marginal benefit of attending the game (such as enjoying the atmosphere live) should be compared to the marginal cost, like potential danger and discomfort. Making decisions this way ensures you get the most value out of your choices.