Keep or Buy, Sunk Costs Heather Alburty purchased a previously owned, two-year-old Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor:
Unfortunately, the new stereo doesn’t completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following:
In a visit to a used car dealer, Heather has found a one-year-old Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am.
1. Conceptual Connection: In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern?
2. Conceptual Connection: Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am?