Asked by Marcell Randall on Apr 26, 2024
Verified
Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:
A) is correct and shows a solid command of the nature of opportunity cost.
B) is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.
C) is incorrect because when the price of a stock falls, the law of demand states that he should buy more shares.
D) is incorrect because it treats the price of the shares as an explicit cost.
Sunk Cost
Expenditure that has been made and cannot be recovered.
Opportunity Cost
The value of the next best alternative forgone as a result of making a decision.
Investment Strategy
A plan for allocating assets in a way that aims to achieve a specific financial goal within a particular time frame.
- Differentiate between sunk costs and relevant costs in the context of making decisions.
Verified Answer
BN
Bre-Bre NorrisMay 01, 2024
Final Answer :
B
Explanation :
Constantine's decision is based on the sunk cost fallacy. The original price he paid for the shares is irrelevant to the current market price and should not influence his decision to hold or sell the shares. He should instead evaluate the current market conditions and his future expectations for the stock to determine whether it is worth holding or selling.
Learning Objectives
- Differentiate between sunk costs and relevant costs in the context of making decisions.