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Sunk Cost and Marginal Cost

Sunk Cost and Marginal Cost. An Auction Experiment. Sunk Cost & Marginal Cost. What do you know about Sunk Cost and Marginal Cost ? ?. Sunk Cost & Marginal Cost. Sunk cost is the cost of a past act

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Sunk Cost and Marginal Cost

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  1. Sunk Cost and Marginal Cost An Auction Experiment

  2. Sunk Cost & Marginal Cost • What do you know about Sunk Cost and Marginal Cost? ?

  3. Sunk Cost & Marginal Cost • Sunk cost is the cost of a past act - it is irrelevant to (and should have no influence on) any production decisions made at present or in future

  4. Sunk Cost & Marginal Cost • Marginal Cost is the change in total cost for producing an additional unit of output

  5. Sunk Cost & Marginal Cost What do they mean actually? • It will be demonstrated by an Auction Experiment.

  6. Auction Experiment • Teacher will be the auctioneer and you all will be the bidders. • At least two $50 bills will be auctioned • If you want to bid, you have to raise your numbered paper plate. • The base price is $0.5 and every bid will be in a minimum of $0.5.

  7. Auction Experiment • If you are not interested in the auction, may I invite you to keep the records for the auction. • The one who can pay the highest price will get the $50 bill, but the winning bidder is not the only bidder who pays for the dollar.

  8. Auction Experiment • At the end of the auction, all bidders who entered a bid during the auction must pay an amount equal to their highest bid. • Since this is a serious auction, you can’t talk to your fellow classmates until the end of all auctions.

  9. Auction Experiment • How does the auction experiment tells us about the difference between Sunk Cost and Marginal Cost?

  10. Auction Experiment • It seems that the auction can never stop once more than 2 people involve in the auction • If you stop bidding, the money you have to pay at the end of the auction will become the Sunk Cost. (remember the definition of Sunk Cost?)

  11. Auction Experiment • So what is the Marginal Cost in the auction experiment? Yes you are right!!

  12. Auction Experiment • The extra $0.5 you paid for the next bid is becoming the Marginal Cost. • Now can you raise some daily examples about Sunk Cost and Marginal Cost?

  13. Video

  14. Video • What is the sunk cost and marginal cost in this case? (Answers: The $5 coin I first paid is the sunk while the other $0.5 coin is the marginal cost.)

  15. Examples • The Hang Send Index dropped from 16820 to 6544. An investor said, “I won’t sell my shares, as long as I hold my shares, I lose nothing. If I sell them at such a low price, I lost a lot.”

  16. Examples • You have waited the bus #11 for 30 minutes and decided not to wait anymore. Therefore you take the taxi finally, but you found that the bus #11 is following your taxi. Question: What are the sunk cost and marginal cost involved here?

  17. If you want to know more • Mateer, G.Drik (1997): “Selling Seats Through An English Auction,”Classroom Expernomics, Volume 6, Number 2 (Fall 1997). [Also available online from http://www.marietta.edu/~delemeeg/expernom.html] • Online slide show http://www.valdosta.edu/~kroland/sld001.htm

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