Managerial Economics

The Shutdown Rule

You may recall earlier in this chapter that, before deciding to disregard the $6000 nonrefundable down payment (to hold the option to operate the ice cream business) as a relevant economic cost, the total cost of operating the business under a plan to sell 36,000 ice cream bars at a price of $1.50 per item would have exceeded the expected revenue. Even after further analysis indicated that the students could improve profit by planning to sell 30,000 ice cream bars at a price of $1.80 each, if the $6000 deposit had not been a sunk cost, there would have been no planned production level and associated price on the demand curve that would have resulted in positive economic profit. So the students would have determined the ice cream ...