Question

Suppose two cities are considering tearing down their stadiums to build new ones. In one city, the old stadium cost $5 million to build, while in the other city, the old stadium cost $50 million to build. If all else is equal, what can we say about how the costs of the old stadiums should affect the cities’ decisions?Choose one:A. They should be more willing to tear down the $5 million stadium, because it cost less to build.B. They should be more willing to tear down the $50 million stadium, because it cost more to build.C. The cost to build the old stadium shouldn’t be considered.

Answer 1

Answer:

The correct answer is option C.

Explanation:

Two cities are planning to demolish their old stadiums and build new ones.  

Keeping everything else equal, the old stadium cost $5 million to build in one city and $50 million to build in the other.  

These construction costs are sunk costs that have been incurred and cannot be recovered. Since these costs cannot be any longer recovered they should not be considered in deciding future investments.