A Level Economics AQA Practice Exam

What is the definition of sunk costs?

1. Costs that can be easily recovered

2. Costs that are ongoing and variable

3. Costs that cannot be recovered once incurred

4. Costs associated with new investments

The correct answer is: Costs that cannot be recovered once incurred

Sunk costs are defined as costs that have already been incurred and cannot be recovered. This definition highlights the characteristic that once these expenses have been paid, they become irrelevant to future decision-making because they will remain the same regardless of the outcome of any future activities. For example, if a company has spent money on research and development for a new product, that expenditure is a sunk cost. It cannot be reclaimed even if the product is not launched successfully. Recognizing sunk costs helps businesses and individuals avoid the "sunk cost fallacy," where they continue to invest time and resources into a failing project simply because they have already invested so much. In contrast, the other options outline characteristics that do not align with the concept of sunk costs. The first option suggests recoverability, which directly contradicts the definition. The second mentions ongoing and variable costs, which are typically related to current operational expenses rather than past expenditures. The fourth option implies that sunk costs are specifically linked to new investments, whereas they can pertain to any costs incurred previously, regardless of whether they relate to new ventures or established activities. Thus, the best definition of sunk costs appropriately highlights their irrecoverable nature.