Chapter 7:
Sunk cost and Short Run Costs
Supplemental Instruction
Iowa State University
1. Fill out Chart:
Term
Explicit cost
Symbol and/or Formula
Leader:
Veronica
Course:
Instructor:
Econ 101
Kreider
Date:
10-28-14
Definition
An opportunity cost where an actual payment is made
Implicit cost
An opportunity cost, but no actual payment is made
Sunk cost
Total fixed cost
TFC
Total variable cost
TVC
Total cost
TC = TFC + TVC
An irrelevant cost because it cannot be affected by any
current or future decision
The cost of an input that can only be adjusted in large,
indivisible amounts
The cost of all inputs that are fixed (cannot be adjusted)
in the short run
The cost of all inputs that are variable (can be adjusted)
in the short run
The cost of all inputs in the short run
Average fixed cost
AFC = TFC/Q
The cost of all fixed inputs per unit of output
Average variable
cost
Average total cost
AVC = TVC/ Q
The cost of all variable inputs per unit of output
ATC = TC/ Q
The cost of all inputs per unit of output
Marginal cost
MC = ΔTC/ΔQ
The change in total cost for each one-unit rise in output
Lumpy input cost
Least-Cost rule
A firm produces any given output level using the
lowest cost combination of inputs available.
2. Jack bought a $35 dollar Sox ticket back in December. On game day, in April, Jack gets invited to his
friends 21st birthday party that conflicts with the game. What should Jack do?
Jack should go to his friend’s party because the Sox ticket is a sunk cost.
3. Sunk costs should not be considered when making decisions.
(1)
Output
(per Day)
0
(2)
Capital
(3) Labor
(4) TFC
(5) TVC
(6) TC
1
0
$ 150
$0
$ 150
(7) MC
(8) AFC
(9) AVC
(10) ATC
—
—
—
$5
$ 10/3
$25/3
$ 15/7
$ 20/7
$5
$ 5/4
$ 10/4
$ 45/12
$ 15/16
$ 10/4
$ 55/16
$ 15/19
$ 50/19
$ 65/19
$ 15/21
$ 60/21
$ 75/21
$ 10/3
30
1
1
$ 150
$ 100
$ 250
$ 10/4
70
1
2
$ 150
$ 200
$ 350
$2
120
1
3
$ 150
$ 300
$ 450
$ 10/4
160
1
4
$ 150
$ 400
$ 550
$ 10/3
190
1
5
$ 150
$ 500
$ 650
$5
210
1
6
$ 150
$ 600
$ 750
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Output
per Day
Units of
Capital
0
20,000
40,000
60,000
80,000
10
10
10
10
10
Number
of
Workers
0
100
133
225
322
TFC
TVC
TC
MC
AFC
AVC
ATC
$1,000
$1,000
$1,000
$1,000
$1,000
$0
$9,000
$12,000
$20,250
$29,000
$1,000
$10,000
$13,000
$21,250
$30,000
$0.45
$0.15
$0.4125
$0.4375
$.05
$0.025
$0.0167
$0.0125
$0.45
$0.3
$0.3375
$0.3625
$0.5
$0.325
$0.354
$0.375
4. A soft drink manufacturer that uses just labor (variable) and capital (fixed) paid a
consulting firm thousands of dollars to calculate short-run costs at various output
levels. But after the cost table (see above) was handed over to the president of the soft
drink company, he spilled Dr. Pepper on it, making some of the entries illegible. The
consulting firm, playing tough, is demanding another payment to provide a duplicate
table.
a. Should the soft-drink president pay up? Or can he fill in the rest of the entries
on his own? Fill in as many entries as you can to determine your answer. (Hint:
First, determine the price of labor.) Cost of labor $90. No, he can fill out the
whole chart.
b. Do MC, C, and ATC have the relationship to each other that you learned in this
chapter? Explain.