Avoidable Costs vs Unavoidable Costs - such as Sunk Costs

The video tutorial explains the concepts of avoidable and unavoidable costs, highlighting their relevance in decision-making. An example is provided comparing the costs of driving versus flying for a trip, illustrating how to identify relevant costs. The tutorial also covers sunk costs, emphasizing their irrelevance in future decisions and warning against the sunk cost fallacy.

What is the main characteristic of avoidable costs?

• They are costs that can be eliminated if a particular alternative is not chosen.

• They are costs that remain constant regardless of the decision.

• They are costs that cannot be eliminated.

• They are costs that have already been incurred.

In the example of deciding between flying or driving, what is the avoidable cost when choosing to drive?

• $65 for round trip airfare

• $0.10 per mile for operating the car

• $0.15 per mile for total car cost

• $1000 per year for car maintenance

Why is the $1000 per year car cost considered unavoidable in the driving vs. flying example?

• It is a cost that will be incurred regardless of the trip.

• It is a cost that varies with the decision.

• It is a cost that only applies to flying.

• It is a cost that can be eliminated by choosing to fly.

What is a sunk cost?

• A cost that can be recovered in the future.

• A cost that should influence current decisions.

• A cost that varies with each decision.

• A cost that has already been incurred and should not affect future decisions.

What is the sunk cost fallacy?

• The belief that past costs should influence future decisions.

• The idea that all costs are avoidable.

• The assumption that unavoidable costs can be eliminated.

• The notion that sunk costs are always relevant.