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Sunk Cost and Marginal Cost: Our Microwave

Summary:
A few weeks ago our microwave went on the blink. It still worked but when we opened the microwave’s door, a fan immediately started up. The GE repairman showed up today. After examining it quickly, he was pretty sure he could fix it. But, he warned us, it was about 8 or 9 years old and the typical life expectancy of that model was between 6 and 8 years. He seemed to be hinting that we should buy a new one. I asked him how much a new one would be. He replied that it would be about 0. That didn’t sound bad. “Can we buy from you and does that include the installation?” “No,” he answered. “You would go to a place like Home Depot but we don’t install.” “How much would it cost to fix this one?” I asked. “A little over 0,” he answered. “But the service charge of

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Sunk Cost and Marginal Cost: Our Microwave

A few weeks ago our microwave went on the blink. It still worked but when we opened the microwave’s door, a fan immediately started up. The GE repairman showed up today.

After examining it quickly, he was pretty sure he could fix it. But, he warned us, it was about 8 or 9 years old and the typical life expectancy of that model was between 6 and 8 years. He seemed to be hinting that we should buy a new one. I asked him how much a new one would be. He replied that it would be about $300. That didn’t sound bad.

“Can we buy from you and does that include the installation?”

“No,” he answered. “You would go to a place like Home Depot but we don’t install.”

“How much would it cost to fix this one?” I asked.

“A little over $200,” he answered.

“But the service charge of about $130 goes towards that $200, right?” I asked.

“Yes,” he answered.

So the $200 was misleading. The $130 service charge was a sunk cost. A little quick arithmetic told me that the marginal cost of getting the microwave fixed would be only a little over $70. And we would have a working microwave right away.

So we had him fix it.

Sunk cost versus marginal cost.

David Henderson
David R. Henderson (born November 21, 1950) is a Canadian-born American economist and author who moved to the United States in 1972 and became a U.S. citizen in 1986, serving on President Ronald Reagan's Council of Economic Advisers from 1982 to 1984.[1] A research fellow at Stanford University's Hoover Institution[2] since 1990, he took a teaching position with the Naval Postgraduate School in Monterey, California in 1984, and is now a full professor of economics.[3]

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