Costs that have already been incurred are not relevant to making future decisions. While the depreciation from the ten million may be unrealized in the accounting statements, economic profit will be maximized whenever marginal revenue is greater than marginal cost. If price is less than average avoidable costs, Dilbert and his friend should shut down. Dilbert's friend commits the sunk-cost fallacy and elects to remain open.
Costs that have already been incurred are not relevant to making future decisions. While the depreciation from the ten million may be unrealized in the accounting statements, economic profit will be maximized whenever marginal revenue is greater than marginal cost. If price is less than average avoidable costs, Dilbert and his friend should shut down. Dilbert's friend commits the sunk-cost fallacy and elects to remain open.
ReplyDeleteCharles Evers posted this ^^^ I thought I was signed in, but apparently not. It won't let me go in and edit this.
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