Question

2. You need a jacket, boots, and gloves, but the jacket you want will use up all the money you have available for outerwear. What is your opportunity cost if you buy the jacket? What is your sunk cost if you buy the jacket? How could you modify your consumption to reduce opportunity cost? If you buy the jacket but find that you need the boots and gloves, how could you modify your budget to compensate for your sunk cost?

Answer 1

Opportunity cost refers to the benefits attached with the alternative which we have not taken up. Here, if we are using all our money to buy the jacket, then we are not able to buy gloves and boots and thus our opportunity cost would be inability to buy the boots and gloves. We are here missing the benefits that boots and gloves would have given us if we would have been able to purchase them instead of spending all money on jacket.

Sunk costs refers to the cost which is once incurred, cannot be changed. So, if we buy the jacket, then the amount spent on the purchase of jacket would be sunk cost as the amount spent once cannot be reversed.

In order to reduce our opportunity cost we may buy boots and gloves with the minimum spending and then can buy the best possible jacket available given the remaining amount.

If we have bought the jacket and then find that we need the boots and gloves, then we cannot reverse our decision as purchase of jacket is a sunk cost and thus in order to buy boots and gloves we need to find another way to pay for them.

Answer 2

If I buy the Jacket, my opportunity cost could be not buying the gloves and the boots because they are the next best choices that have been sacrificed. The sunk cost in the situation is money that has been used to purchase the jacket