Question

A profit-maximizing decision must be made about whether to keep a bed & breakfast operating. Until the place sells, the mortgage of $3000/month must be paid, since it is a sunk cost. If the restaurant operates, costs rise by $4000 per month, but revenue will be only $6000 per month. Until the building can be sold,

Answer 1

Solution: it is best to ignore sunk cost and keep the bed & breakfast operating

Explanation:Sunk costs are costs that were incurred in the past. These are irrelevant for decisions, because they cannot be changed. Thus are not to be taken into account while making decision because no action can reverse them. Thus it is good to ignore it and keep the bed & breakfast operating.