Why are there no sunk costs for businesses in the long run? Discuss how managers should treat...

Question:

Why are there no sunk costs for businesses in the long run? Discuss how managers should treat sunk costs when making market entry or exist decisions.

Sunk Costs:

Sunk costs refer to the money which has already been spent by a business and cannot be recovered in any way. The sunk costs are not included in the future decision of the company since they will always remain constant no matter what is done and the outcome of the decision. Any production company may have sunk costs such as purchasing a machine, any production equipment, and any lease expense on the company.

Answer and Explanation: 1

Sunk expenses do not exist in the long run because the corporation can choose not to do operations at all and incur no costs. All variables can be changed in the long run, unlike in the short run, where only a single variable can be changed. Therefore, in the long run, the corporation can change the decision of the costs they can incur on their variables, thus eliminating the possibility of sunk costs.

The managers should treat the sunk costs as bygones and should not be considered when deciding whether to enter the market or exit the market. The managers should ignore the sunk costs and treat them as bygones to help decision-makers avoid wasting resources on unprofitable projects by preventing them from wasting money. They do all this intending to focus on future costs and returns.


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Sunk Costs: Definition & Examples

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Chapter 31 / Lesson 8
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Sunk costs refer to incurred costs that can no longer be recovered. Learn more about the definition of sunk costs and explore examples of sunk costs in businesses.


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