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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development?

To determine

Applying the concept: Rational people think at the margin.

Explanation

For example, suppose you are considering total cost as $5 million and total revenue as $3 million. Then cost is greater than benefit and there is a loss of $ 3 million (36) which implies that you should not have started it. But this conclusion is wrong. It is because, what one needs now is to consider reducing the loss. So the sunk cost of $5 million should no longer be under consideration. A person should consider the chance to earn profits at the margin

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