Final answer:
Differential costs are the costs that arise from choosing one project over another and are essential for decision-making. Sunk costs, which occurred in the past and cannot be recovered, should not be considered in current decisions as they are irrelevant to the decision-making process.
Step-by-step explanation:
The costs between two alternative projects that would result from selecting one alternative instead of the other are known as differential costs. These are the additional costs incurred from choosing one option over the other and are relevant for decision-making.
On the other hand, sunk costs are expenditures that have already occurred in the past and cannot be recovered; hence, they should not influence current decisions. This is in line with the budget constraint framework, which focuses on the current and future implications of economic choices without considering sunk costs.
Understanding this concept is essential in business decision-making to ensure additional marginal gains are accurately assessed and that businesses do not base decisions on costs that cannot change.