★ Must-know
📌 Sunk costs have already been incurred and cannot be recovered, whereas opportunity costs are the returns forgone by using resources in their next-best alternative.
📌 Economic cost equals accounting cost plus opportunity cost, so a project should be undertaken when its revenue exceeds its full economic cost.
Further detail
Ignore sunk costs, include opportunity costs.
1. Which cost should be included when evaluating a forward-looking business decision?
2. When should a project be undertaken under the economic-cost decision rule?
3. A factory experiences economies of scale when what happens as its output increases?
What distinguishes sunk costs from opportunity costs?
Sunk costs are already incurred and unrecoverable, opportunity costs are forgone returns from the next-best alternative.
How is economic cost calculated?
Economic cost equals accounting cost plus opportunity cost.
When should a project be undertaken based on economic cost?
When its revenue exceeds its full economic cost.
What does the opportunity cost of attending school include?
Earnings forgone from the individual’s previous job and other relevant alternatives.
When do economies of scale occur?
When average cost decreases as output increases.
When do diseconomies of scale occur?
When average cost increases as output increases.
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