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Unformatted text preview: >> Making Decisions Section 3: Sunk Costs chapter 7 When making decisions, knowing what to ignore is important. Although we have devot- ed much attention in this chapter to costs that are important to take into account when making a decision, some costs should be ignored when doing so. In this section we will focus on the kinds of costs that people should ignorewhat economists call sunk costs and why they should be ignored. To gain some intuition, consider the following scenario. You own a car that is a few years old, and you have just replaced the brake pads at a cost of $250. But then you find out that the entire brake system is defective and must be replacedinclud- ing the newly installed brake pads. This will cost you an additional $1,500. Alternatively, you could sell the car and buy another of comparable quality, but with no brake defects, by spending an additional $1,600. What should you do: fix your old car, or sell it and buy another?...
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- Fall '06