Question

An Uber driver faces costs for driving that include sunk costs like insurance that contribute to the average cost per mile of $.50. Yet when a rider offers to pay less than that for a ride, the driver agrees because 1) the driver is irrational; this decision will cause a loss. 2) the driver needs to cover all sunk costs to be better off by accepting the offer. 3) sunk costs like auto insurance (in this case) do not increase as driving increases

Answer 1

Answer:

The correct answer is option 3.

Explanation:

The average cost per mile is $0.50.

It includes sunk cost such as the cost of insurance.  

When a rider offers to pay less than the average cost for a ride the driver still accepts it. This is because the insurance cost is a fixed cost it does not increase with the increase in driving. The driver only needs to cover the variable cost through fare. So even if he is getting less than $0.50 from the rider, it will be accepted as the variable cost is being covered.