Keep-or-Buy Decision, Sunk Costs
Susan Crossing purchased a used Ford Focus for $8,000. Since purchasing the car, she has spent the following amounts on parts and labor:
New stereo system $1,500
New paint job 2,500
New tires 900
New muffler 250
Total $5,150
Unfortunately, the car needs a few major repairs now; among other things, the brake rotors and pads must be replaced, and the radiator has sprung a leak. (A new radiator is needed.) The repairs are estimated to cost $2,500. Susan has looked around at other used cars and has found a used Honda Civic for $8,500 that is in very good condition and is approximately the same age as the Ford Focus. Susan can sell the Ford Focus 'as is' for $6,500.
Required
Question 1: In trying to decide whether to repair the Ford Focus or buy the Honda Civic, Susan is upset because she has already spent $13,150 on the Focus. The car seems like it costs too much to sell at such a large loss. How would you react to her dilemma?
Question 2: Assuming that Susan would be equally happy with either the Ford Focus or the Honda Civic, should she buy the Civic or repair the Focus? Explain your answer.
Question 3: Are there any qualitative factors that might enter into this decision? Explain.