Question

The budget constraint framework, which assumes that decision-makers are rational and make decisions at the margin, assumes that ____________

Select the correct answer below:
a) sunk costs are a major determinant in the decision
b) sunk costs are irrelevant to the decision, therefore, should be ignored
c) decision-makers aim to recover sunk costs
d) decision-makers consider sunk costs to be a part of the marginal cost calculation

Answer 1

The budget constraint framework assumes that decision-makers act rationally and focus on the margin, treating sunk costs, which cannot be recovered, as irrelevant to current economic decisions.

Step-by-step explanation:

In the context of the budget constraint framework, the correct answer to the student's question is that b) sunk costs are irrelevant to the decision, therefore, should be ignored. This framework is predicated on the fundamental economic principle that decision-makers are rational and make choices based on their current options and the expected future benefits and costs—thus, forward-thinking and at the margin. Sunk costs are costs that have already been incurred and cannot be recovered; hence they do not influence the marginal cost calculation or present economic choices. Future decisions are made by considering the potential additional benefits and comparing them to the potential additional costs. As sunk costs do not change with future actions, they do not affect these marginal comparisons and should be disregarded.