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2 January, 06:06

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.

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Answers (1)
  1. 2 January, 06:20
    0
    Option (a) is correct.

    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.
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