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.
READER COMMENTS
Dylan
Jun 17 2021 at 7:30pm
Plus, you’ve avoided the disposal costs for at least a little while longer. Getting rid of appliances and electronics responsibly can take a bit of work. Now, it sounds like you have a bigger microwave than I do (installation has never required more than finding a place on the counter and plugging it in), so maybe if you buy one with installation that includes taking away the old one making things fairly easy (at a cost), but for us it would involve usually waiting around until the city does an electronics disposal at some central collection place (only a couple a year) and then hauling the microwave on the subway or taking an Uber to dispose of the thing.
David Henderson
Jun 17 2021 at 11:28pm
Good point.
Evan Sherman
Jun 18 2021 at 2:05pm
When it comes to disposal, I would propose that the real optimal move is to deploy the oft-neglected 2nd R of the 3 environmental consumerism R’s: “Re-use”. There are lots of people with a combination of skills, knowledge, and cheap(er) time for whom the cost/benefit of fixing the microwave themselves (and then likely re-selling it) is much more appealing than that ratio would be for the some middle to upper-middle class knowledge workers. Advertize that you are willing to give the microwave away for free, and someone will come along and pick it up at no cost to you. They’ll try to fix it (and assume the risk of not being able to fix it) and reuse it or re-sell it to someone who cannot or will not spend the money on a new microwave.
Now, repair may still present a better cost/benefit ratio for the original owner than replacement for other reasons. But you should not be accounting for owner’s costs of disposal in assessing the costs of replacement.
[There is an environmental scorecard risk/reward event happening here, but I would argue it favors giving it to the cheaper-time would-be fixer. If they cannot fix it, the would-be fixer may dispose of it in a landfil – not ideal. But if they do manage to fix it so that someone can use it for a few more years, the corresponding 0.33 microwave (give or take) of lowered new microwave demand has positive environmental impact, assuming that bringing a new microwave incurs environmental costs. I guess determining the tradeoff depends on the odds of successful repair, but if someone is willing to take it and try to fix it, they think they are not wasting their time, so I always assume it’s more likely than not that they succeed.]
Mark Barbieri
Jun 18 2021 at 5:59pm
Where we live, we set stuff like that out by are curb the day before heavy trash pickup. There are people that drive around in beat up old trucks that collect almost anything of value before the heavy trash people come to get it. It’s like a free re-use service. We love it because we get rid of unwanted stuff, someone makes a profit re-selling it, and someone that wants it gets it.
David Henderson
Jun 18 2021 at 7:03pm
Nice.
I tried that with an old working color TV about 12 years ago and it was picked up within hours.
I tried it with an old, but never, color TV about 5 years ago and no one picked it up.
Nice regional index of how wealthy people are becoming.
Dylan
Jun 20 2021 at 9:39am
This is a good point and something I have done a couple years ago. I think your addendum on environmental scorecard/risk is worth thinking about a little more (for me personally, that is). I posted my stuff on Craigslist and a guy came and took all of it, including some stuff that was almost certainly trash (a nearly 20 year old laptop). In the future, I’d probably try to be a little more discerning about the stuff I give out and strip non-functioning batteries and the like out to minimize the chances of them ending up in the landfill (or burned as most trash is in my area)
Even with this option, I still find disposal to be a significant enough hassle that it keeps me from acquiring a lot of things. Before buying almost any durable good, I try to imagine what the process of getting rid of it 5, 10, or 15 years down the line will look like. Generally that gives me enough of a pause to not buy.
Speed
Jun 17 2021 at 9:12pm
On the very few occasions that our microwave oven has failed, we’ve never considered for more than a minute or two, having it repaired. We would have to …
Contact a service organization (if one exists).
Make an appointment, usually some days in the future during which we would be without the service of a microwave oven.
Repairman can either (a) repair it for some price, assuming the needed part(s) are on hand, or (b) repair it some time in the future when the parts are available for some price or (c) may be unable to repair it at any cost. In any case we will have to pay for the service call.
Because we have the internet, we can quickly and easily compare features and prices and retailers to determine the cost and availability of a replacement microwave oven.
Large organizations managing large fleets of machines, trucks, automobiles or aircraft have good statistics on cost of breakdowns, average life of wear parts, cost of repair, cost of breakdown (loss of availability), cost of parts inventory and manage their large fleets accordingly.
In this case, I’d simply buy a new microwave — maybe one with more power and features. Perhaps they’re on sale this week.
Coda: If an operating microwave is important to us (if we ran a restaurant for example) I would have a spare in the storeroom. Possibly one bought on sale.
David Henderson
Jun 17 2021 at 11:33pm
In our case, the wait for the GE repairman was about 2 weeks. But except for the fan noise, it worked fine during those 2 weeks. Notice that today the wait for the GE guy was a sunk cost also.
Felipe
Jun 19 2021 at 12:17am
An important point is that sunk costs are sunk even if they were not optimal. That is: the fact that buying a new one might have been a better choice all along, makes no difference when the point the repairman that is already there. At that point, the better choice is to fix it.
Evan Sherman
Jun 18 2021 at 2:30pm
“Large organizations managing large fleets of machines, trucks, automobiles or aircraft have good statistics on cost of breakdowns, average life of wear parts, cost of repair, cost of breakdown (loss of availability), cost of parts inventory and manage their large fleets accordingly.”
Yes, this. Our inclination is always to assume that our faithful appliance will be the exception and keep on trucking. But these people projecting average lifecycles know what they are doing.
Jon Murphy
Jun 17 2021 at 9:57pm
This really is brilliant, both for the analysis and the importance of asking the right question. It would not have occured to me to ask about the service fee. I would have just assumed the $200 was the marginal cost!
David Henderson
Jun 17 2021 at 11:28pm
Thanks.
Alan Goldhammer
Jun 18 2021 at 8:17am
Built in microwaves are a pain. Ours completely failed in April 2020 just as the lock down started. It had been in service for 13 years. Unfortunately the model is no longer made and the existing grille cover that matches the built in oven is the wrong size for the new model. We had to purchase not only the new microwave but the cover as well and when I looked at the cost of the old one we paid about 40% more for the new one.
A $70 repair job indicates that there was not a major problem with your microwave. You were lucky.
Evan Sherman
Jun 18 2021 at 2:25pm
Very wise to extract the marginal cost from the whole number. I would humbly propose, though, that you still traded less than ideally for two reasons:
First: It should have been easy to foresee that the service fee + marginal cost would be more than half of the cost of a new microwave. We can distinguish sunk cost of the service fee vs. the marginal cost of the repair, but only if we assume the service call as a given. However, DH could have simply not called the repair guy but rather immediately set about buying and replacing the microwave (yes, unskilled homeowners should be able to do that themselves).
As such, DH still fundamentally paid 2/3 the cost of a new microwave for an 8 year old (i.e. end of conventional lifecycle) microwave. This is what the repair guy was trying to imply to DH: Even if the microwave worked when the repair guy left, odds were high that another part would fail soon.
Second: Even if we pretend that the marginal cost is the only cost, and the the service call was divinely predetermined, $70 to fix an 8 year old microwave still presents a dubious trade. If the average $300 microwave lasts 7 years, then the effective cost of ownership (presuming no repairs, warranties, etc.) is about $43 / year. So the $70 repair is only worth it if the microwave has no issues for about 1 2/3 year+ or so. For an 8+ year old microwave that the expert repair guy says generally lasts about 7?… Dubious trade.
(All of this assumes that the only relevant currency is dollars. DH’s valuable time is of course a part of this: dealing with part failure and the inability to actually use the broken microwave in the future is not nothing.)
Really loving this little economic-ideas-illustrated-from-banal-middle-class-purchases blog post series, btw.
Jon Murphy
Jun 18 2021 at 4:03pm
Ok, but that’s irrelevant. The call was made. The question was: given the relevant choices David faced (pay for a repair or buy a new unit), what decision should have been made had different information been available at an earlier time period has no bearing on the choice made.
Further, I do not think you see the connection between the phone call for service and the information about the unit. David did not know what was wrong with the microwave. To get the relevant information, he had to call; the call is an information cost. It is only with the benefit of Godlike hindsight does the call appear “less than ideal.” At the time of the decision, it was beneficial to call.
In other words, your claim of “less than ideal” is only an illusion created by information that was gathered later as a result of the action taken.
Michael Stack
Jun 18 2021 at 10:41pm
I’ll share the experience I had with our microwave about a year ago.
It stopped working – the microwave would insist that the door needed to be closed, even though it was already closed. I called the service company, and they shared with me the cost of the visit. The cost of the visit, I was told, would NOT go toward the repair cost.
I asked about the expected repair cost. They told me they had no idea, as they didn’t know what was wrong. I insisted they talk to one of their repair people, and I got a really solid answer. Of course they did not *know* what was wrong, but I was betting they had a very good guess.
The cost of the repair would have dwarfed the replacement cost. I’ve never worked on microwaves before, and I’m not especially handy, but with the help of YouTube, I was able to fix the microwave myself for $0 and about 30 minutes of my time.
So if you press these repair places a bit, you can get some good information to act on before the service visit. Hopefully this helps somebody.
Evan Sherman
Jun 21 2021 at 9:43am
Apologies for any lack of clear writing on my part, but I suspect that you are missing the core point here. The core point: Any sensible middle class homeowner could have easily known that the service call would be, say, $80- $150 USD before the service call was made. And, replacing the microwave without ever knowing what was wrong with it is of course always an available option. Therefore, the service call was entirely avoidable. And, given the ratio of the service call cost (before even the tacked on repair cost) vs. the replacement cost, avoiding the service call is not possible, it is pretty clearly optimal (assuming the premises about the 7 year average lifespan of the microwave model and the 8.5 year age of the actual microwave – premises that could also have been established without the service call).
Think about it this way: Forget the fact that DH is talking about his own microwave in his kitchen (and standing in his kitchen discussing it with the repairman). Imagine instead a world in which a) no repairmen exist and b) DH has no microwave and goes to the hardware store to buy one. The fictional store for some reason has only one model – with a known 7 year old average lifespan – but in 3 conditions: $300 for new, $200 for an 8.5 year old microwave, and $70 for the 8.5 year old. Presuming the 7 year old average lifespan, and those prices (which is to say, $43ish a year for appliance ownership) no rational consumer would buy any of them other than the new microwave.
Thus, it literally does not matter what was wrong with the microwave. All that matters is that DH found the fault unacceptable (E.g. the microwave worked but the fan was unacceptably annoying), such that the status quo of owning the microwave in its faulty state had to change. As soon as he decieded that, the price of repair (assuming DH has to call a repair guy for this option) simply cound not have possibly beaten the price of replacement. Incurring the costs of the service call already put DH in the red vs. the counterfactual in which DH just immediately bought the new microwave.
Sorry again if I was less than clear about this in the original response. I am like bajilionth generation advanced economy mid-middle class over here, so for me and everyone I know, this practice of comparing repair costs vs. replacement costs *before the service call is made* is just a given. I realize that some readers on here might be a couple generations into the upper-middle class, so they may have to learn anew.
Evan Sherman
Jun 21 2021 at 9:48am
Man, this comment format really humbles me – in that it forces me to realize how much I depend on editing drafts after the fact and on autocorrect features (for spelling especially). Anyway, “only” is needed between “not” and “possible” for the 1st paragraph above to make sense.
“And, given the ratio of the service call cost (before even the tacked on repair cost) vs. the replacement cost, avoiding the service call is not ONLY possible, it is pretty clearly optimal
Thomas Lee Hutcheson
Jun 19 2021 at 5:56pm
Henderson made the right call, but the situation is not the usual one in which the “sunk cost” fallacy is alleged. Usually the situation is one one of an ongoing investment with the issue being to continue or not. Of course the amount already invested is irrelevant. However much it may have cost to build 9/10 of a bridge is irrelevant if the value of the bridge is less than 1/10 of the total cost.
I’ve just faced the same decision as Henderson with a leaky faucet. We’ve decided (after getting a second, $75, opinion) to change a key part rather than replace, guessing that with the repair the faucet will be approximately as good as new at 1/2 the cost.
Evan Sherman
Jun 21 2021 at 11:31am
Nice flex with the super fancy faucet! 🙂 $75 x 2 service calls plus repair fee makes me think we’re talking about a $400+ faucet. Must be nice!
But isn’t they key difference here the much lower number of moving parts on a faucet vs. a microwave? That is to say, assuming that you like the aesthetic of the faucet enough to not want to replace it for taste reasons, it is at least believable that fixing a faucet would essentially restart the clock on needing a new faucet. So fixing a $400 faucet for $200 dollars and then using the faucet for a full product lifecycle would be a great trade. Maybe that’s a little over-generous to assume that the faucet now gets a full lifecyle (and there’s always random failure of even truly new goods), but it’s not totally implausible.
When you fix one faulty part on an 8.5 year old microwave, though, you have very much not re-started the product lifecycle clock. All of the other moving parts on the microwave, the junctions of those parts, etc. are still 8.5 years old vs. a 7 year average product lifecycle. In this way, you’ve paid a large portion of the cost of a new model for an old model that is likely to fail again soon.
dave schutz
Jun 19 2021 at 9:54pm
I can generally find a working microwave for twenty to thirty dollars at Goodwill. I will never buy new again!
Michael Rulle
Jun 23 2021 at 9:31am
I re-read this and I realized you had already paid the 170 dollars for the service call——-so I did not originally see this as a sunk cost. So you were betting 30 against 300 plus some presumed future service cost. So I get it. BUT
No insult intended—-but more as a joke——your story reminds me of the joke about the economist and the carpenter stuck on a deserted island. They ask each other “how do we get off this island”. The carpenter went through the various ways they could use the materials to build a floating craft. The economist said, “well, first, assume we have a boat………”
My serious point is how can one not know 6-8 years is a decent run for a microwave? And in my house the way to “install” a microwave is to plug it in!
I also know old repaired devices have a short life span. You should have just bought a new one immediately. We also have our “garbage men” pick up old appliances——and are required by law to dispose properly.
Just some advice—-which could be wrong.
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