4. Using the information from (3), what happens if the gym decides to charge Jerry a one-time non-refundable service fee of $25 for the use of a new member-trainer work-out area. How does this fee impact Jerry’s choice of the best action in (3) and why?
Answer:
Introducing a one-time non-refundable consultation fee of $25 would have the effect of changing your total cost function from, to . On the graph from (8) the TC curve would be shifted up by 25 units. Despite this shift in the TC curve this does not change the marginal cost curve. Since the MC function and the MB function are the same you will find that your best choice from (8) is the same, even after adding a one-time service fee. The service fee is what is known as a sunk cost. Sunk costs have no effect on Jerry’s best choice because regardless of how many sessions he employs his trainer, the service fee is constant.