Vecon Lab Input Choices, Sunk and Opportunity Costs: Introduction

Each participant plays the role of a firm that must make decisions about inputs to be used in production. One input, selected in advance, generates a sunk cost, and a second input determines variable costs. Participants are placed in a competitive environment that satisfies incentive compatibility conditions for accurate cost revelation (proxy bidding with an exogenous "market price"). The optimal supply decisions depend on whether the fixed entry cost is a sunk cost that is automatically incurred, or whether it is an avoibable fixed cost, which serves to limit supply to the range of marginal cost above minimum average total cost.

Key Concepts:
Supply (Long Run)
Opportunity Cost
Sunk Cost
Avoidable Fixed Cost
Average Total Cost
Copyright 2009, Charles Holt, Please report problems and suggestions: veconlab@gmail.com

Vecon Lab - April 21, 2019