The U.S. government has been trying to decide whether or not to invest in full production of the...

Question:

The U.S. government has been trying to decide whether or not to invest in full production of the new, advanced missiles that it has developed. One of the arguments in favor of the investment in the production is that since so much money has been spent on their development, it would be a waste of money not to invest on the project. What is the major problem with this argument?

a. It ignores the opportunity cost of the money that has been spent.

b. It includes sunk costs in the decision.

c. It includes opportunity costs in the decision.

d. It does not reflect changes in net working capital.

The Sunk Cost Fallacy:

A sunk cost is a finance or accounting term. It is used to refer to costs that can't be recouped. Sunk costs should not be included in the decision to move forward with a project. This is because the costs will not change, regardless of the return. The "Sunk Cost Fallacy" is a term used to describe a common psychological trap that gambling addicts face, but it can also be applied to investments. It is the belief that since you have paid into something, you are also committed to it. Therefore, you should keep doing it regardless of the result. The gambler thinks the machine is "close to payout", when the amount of money they've put into the machine has nothing to do with the outcome. It's a trap.

Answer and Explanation: 1

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The major problem with this argument is: b. It includes sunk costs in the decision.

a. It ignores the opportunity cost of the money that has been...

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Sunk Costs: Definition & Examples

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Chapter 31 / Lesson 8
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Understand the sunk cost definition. Learn the meaning of sunk cost and sunk cost trap with the help of the sunk cost examples and sunk cost fallacy examples.


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