Part II: The eccentric billionaire Zaggy Zargawhoop must decide today whether to repair his yacht again. Last week, Zaggy paid $9 million to the repair shop to fix his yacht. But Zaggy learned today that the yacht requires $12 million in additional repairs and upgrades. If Zaggy completes the $12 million in repairs, using the yacht would be worth $18 million to Zaggy. If Zaggy does not complete the repairs, the yacht is worth zero. Use numbers in your answers. a. Should Zaggy decide to purchase the repairs to his yacht today? Explain briefly using economic reasoning. b. If he knew last week what he knows now, would Zaggy have repaired his yacht last week? Explain. c. Identify the economic concept that describes the $9 million repair bill from last week. Explain vour answer.
Part II: The eccentric billionaire Zaggy Zargawhoop must decide today whether to repair his yacht again. Last week, Zaggy paid $9 million to the repair shop to fix his yacht. But Zaggy learned today that the yacht requires $12 million in additional repairs and upgrades. If Zaggy completes the $12 million in repairs, using the yacht would be worth $18 million to Zaggy. If Zaggy does not complete the repairs, the yacht is worth zero. Use numbers in your answers. a. Should Zaggy decide to purchase the repairs to his yacht today? Explain briefly using economic reasoning. b. If he knew last week what he knows now, would Zaggy have repaired his yacht last week? Explain. c. Identify the economic concept that describes the $9 million repair bill from last week. Explain vour answer.
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter16: Bargaining
Section: Chapter Questions
Problem 2MC
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Question
Hi I need the Answers to this question please
Transcribed Image Text:Part II: The eccentric billionaire Zaggy Zargawhoop must decide today whether to repair his
yacht again. Last week, Zaggy paid $9 million to the repair shop to fix his yacht. But Zaggy
learned today that the yacht requires $12 million in additional repairs and upgrades. If Zaggy
completes the $12 million in repairs, using the yacht would be worth $18 million to Zaggy. If
Zaggy does not complete the repairs, the yacht is worth zero. Use numbers in your answers.
a. Should Zaggy decide to purchase the repairs to his yacht today? Explain briefly using
economic reasoning.
b. If he knew last week what he knows now, would Zaggy have repaired his yacht last week?
Explain.
c. Identify the economic concept that describes the $9 million repair bill from last week. Explain
your answer.
Expert Solution
Step 1
a. Yes he should. Since Zaggy has already paid the $9B, which he will not be getting back, he looses $9B if he does not repair. Bit if he repairs, he loses $(12+9-18)B= $3B. So his loss is lower if he repairs.
b. No, he would not. In that case he would see that by repairing he loses $3B. He would rather let the yacht be worth nothing.
c. The concept is known as sunk cost. Refers to the cost that has been incurred and not possible to recover.
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