A columnist in the Wall Street Journal observes that “the highest-cost producers mining Canada’s oil sands can’t make profits at $50 but, since they have big sunk costs and little need to reinvest, they will keep pumping to generate cash.”
a. What does the columnist mean by “sunk costs”? Give an example of a sunk cost that the columnist is referring to.
b. If the columnist is correct, what must be true of the relationship between these firms’ variable costs and their revenue from selling oil?
c. Will the situation the columnist is describing continue indefinitely? Briefly explain.