The Economics of CDs

I sold several CDs to a second-hand music store a few days ago. Before heading downtown, I told a friend that I’d be willing to sell some albums for around $5 each. She said that I’d be “losing money” by doing this, since I probably bought each CD for around $15. This is faulty reasoning, as it does not take sunk costs into account.

In economics, sunk costs refer to expenditures that have been made in the past and are non-recoverable. Sunk costs are fixed in the sense that they cannot be changed once they are incurred. Since future actions do not affect sunk costs, one should not consider them when making decisions.

Regardless of whether I sold or kept the CDs, the cost of acquiring the music ($15) had already been incurred and could not be recovered. Thus, in the decision to sell or keep the CDs, the only relevant factors to consider were how much utility I get from keeping the album (the benefit of listening to music), versus the utility I get from selling them (the benefit of receiving cash). (Note that if I keep the CDs, my utility would only be vaguely and indirectly measured, as there’s no way to quantify the benefits of listening to music. If I sell the albums, my utility is easily measured, as it equals the amount of cash proceeds I get).

I ended up selling a few of the albums for an average of $4 each. I didn’t “lose” $11 per album, since the $15 paid to acquire each CD was not recoverable regardless of my decision (and was thus ignored for the purposes of decision-making). Furthermore, I think I’ll get more utility by having $4 cash than by owning each CD. (They were bad albums). Therefore, by ignoring sunk costs, I was able to maximize my utility, or, in simpler terms, make the best decision possible given the circumstances.

Crack Fiends and French Fries

I spent most of yesterday downtown with Levi and Luba. It was a lot of fun, except for about 2 seconds during what shall now be known as “The McDonald’s Incident”.

The three of us were sitting in the McDonald’s at Queen and Spadina, one of the seediest restaurants in the city, talking about our families. Suddenly, a large, unstable-looking man came in and threw several large plastic bags on the table. In a loud, serious voice, he yelled, “Freeze! This is a stickup!” Everyone stopped abruptly and stared at him.

First thought: fear.

Second thought: give the guy your wallet if necessary, and you and your friends won’t be hurt.

Then, in a sequence so bizarre I couldn’t make this up even if I wanted to, he shouted, “I just robbed No Frills! I’m selling this meat at half price!” while motioning to the bags. The gentleman then sat on a stool and pulled out a pipe. He mentioned that he needed some crack to get going. Incredibly, he started smoking crack in the middle of the crowded McDonald’s, and ran towards the bathroom while the manager chased him. The three of us left at this point.

I'll always remember the he McDonald’s Incident. It proved that I can make a quick, rational decision in a potentially dangerous situation -- and it was bizarre and hilarious.

The Night is Yonge

Nathan and I walked south on Yonge Street yesterday, starting at Finch Ave. After approximately 4.5 hours (including a thirty minute break for Thai food at the Green Mango restaurant at Yonge & Bloor), we arrived at Yonge & King, and then walked to Union Station. Thus, we traversed the entire Yonge subway line in one evening, with only one half-hour break. It took us about four hours longer than actually taking the subway, but we did save $2.75.

Why did we do this? To prove that we could.