Question

Suppose high-speed rail links between two pairs of cities cost a total $1B each. The first pair of cities has already spent $200M (that cannot be recovered) on the preliminary surveying work, while the second pair has not yet begun work. It is more likely that the first pair of cities will complete the project than that the second pair will undertake the project.

Answer 1

The cost of two high-speed rail links is $1B each. Because the first link has been incurred $200M that is irrecoverable, this investment is now a sunk cost and so it will not affect the decision of whether further investment is made or not. Now that the second pair has not yet begun work it is uncertain that the first pair of cities will complete the project before second pair undertakes it. The decision if the second pair will undertake the project as well as the completion of first project do not depend on what amount has previously been spent.

The reason is that sunk costs are not counted because they cannot be recovered. Hence both projects are equally likely to be completed, le other things remained unchanged.