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,

a) it is best to keep the bed & breakfast operating because it is profitable.

b) it is best to ignore sunk costs and keep the bed & breakfast operating.

c) it is best to shut down the bed & breakfast since it is taking a loss.

Answer 1

Since Total revenue per month equals 6000 & Total variable cost per month is 4000, thus making profits

But since per month mortgage cost is 3000, thus it is making a net loss of $1000 per month

We can't ignore sunk cost bcoz it has been incurred per month & it is not a one time cost, so firm should shut down

Option C) is right only.