Question

Stephen is restoring a car and has already spent $4,000 on the restoration. He expects to be able to sell the car for $5800. Stephen discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. He could also sell the car now, without completing the additional work, for $3,800. What should he do?a. He should sell the car now for $3,800.

b. He should keep the car since it wouldn't be rational to spend $6,400 restoring a car and then sell it for only $5,800.
c. He should complete the additional work and sell the car for $5,800.
d. It does not matter which action he takes since the outcome will be the same either way.

Answer 1

Option (a) is correct.

Step-by-step explanation:

Case 1:

Spent on restoration = $4,000

He expects to be able to sell the car for $5800

There is a need to do an additional work for making the car worth $5,800 = $2,400

Hence, total cost = $4,000 + $2,400

= $6,400

Loss on selling a car = Total cost - Selling price

= $6,400 - $5,800

= $600

Case 2:

If he sells the car without making any additional work then the car is sold for $3,800:

Total cost = Spent on restoration

= $4,000

Therefore,

Loss on selling a car = Total cost - Selling price

= $4,000 - $3,800

= $200

Hence,

We can conclude that Stephen is able to minimize its loss by selling the car for $3,800.