economics question, been thinking about for few day….?
Suppose that Pat and Sandy’s restaurant has just installed fancy new décor costing $10,000. Suppose also that in a distant solar system, there is a planet identical to earth in every way except that at this planet’s Pat and Sandy’s, the same redecoration cost $20,000. TRUE or FALSE: Pat and Sandy’s burgers will be more expensive in the distant solar system than on earth. WHY?
I love the two comments above. Great tongue-in-cheek humor.
Alas, the answer is False. The decoration cost for the restaurant is called sunk cost in economics and sunk costs should not factor into the firm’s output and pricing decision.
In both universes, Pat n Sandy will set production at the point where marginal cost = marginal revenue. And since sunk costs are not part of marginal cost, it is not relevant to their output decisions.
Same output and pricing in both universes.
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