Sunk Cost and Marginal Cost: Our Microwave
A few weeks ago our microwave went on the blink. It still worked but when we opened the microwave’s door, a fan immediately started up. The GE repairman showed up today.
After examining it quickly, he was pretty sure he could fix it. But, he warned us, it was about 8 or 9 years old and the typical life expectancy of that model was between 6 and 8 years. He seemed to be hinting that we should buy a new one. I asked him how much a new one would be. He replied that it would be about $300. That didn’t sound bad.
“Can we buy from you and does that include the installation?”
“No,” he answered. “You would go to a place like Home Depot but we don’t install.”
“How much would it cost to fix this one?” I asked.
“A little over $200,” he answered.
“But the service charge of about $130 goes towards that $200, right?” I asked.
“Yes,” he answered.
So the $200 was misleading. The $130 service charge was a sunk cost. A little quick arithmetic told me that the marginal cost of getting the microwave fixed would be only a little over $70. And we would have a working microwave right away.
So we had him fix it.
Sunk cost versus marginal cost.