Question

You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.
O opportunity
O sunk
O incremental
O fixed
O relevant

Answer 1

Answer:

The answer is a sunk cost.

Explanation:

Sunk cost is irrelevant in present decision making. It is the cost that had already been incurred. It is irreversible.

Here, $500 spent on fixing the transmission does not matter again.

Opportunity cost is wrong because it means the alternative that has been forgone i.e alternative not chosen. For example, if you have an opportunity to either buy milk or bread and you went for bread, the opportunity cost is the cost of milk you didnt buy.

Incremental cost is also wrong. Incremental cost is the cost that was realized because of a decision.