Question

Ms Hajra Riaz is attempting to decide whether or not to drop a course she is currently enrolled in "Financial Management". If she does, she will forfeit the money spent on tuition. Which of the following statement is/are true?

I.             Remaining in this class means less time for studying for her accounting course--thus, staying in requires that she incurs opportunity costs

II.            The tuition cost is irrelevant to the decision

III.          Whether or not she drops the course, she cannot sell the textbook back to the college bookstore--therefore, it is a sunk cost.

a.             I only

b.            I and II only

c.             II and III only

d.            I, II, and III only

e.             None of the above.

Answer 1

i)Opprtunity cost is loss of other alternatives when one alternative is choosen.For Ms Hajra Riaz studying for her accounting course is one alternative and droping of current course is another alternative.Thus staying in requires requires that she incurs opportunity costs in the form of less time for studying accounting course.

ii)Irrelevant cost is the cost that are not relevant for decision making.Sunk cost are one of the example of irrelevant cost.Tuition is sunk cost as it is already incurred.

iii)As per definition of sunk cost,the given statement is correct.

Thus correct answer is option d i.e I, II, and III only.