Question

The construction estimator told the storage unit owner that building another section of storage units will likely add 100 more storage space renters to the bottom line. The rational storage business owner considered the rental prices of an additional 100 units, but he would decide to add more units if and only if

Answer 1

As a rational storage unit owner, his agenda is to make profits or at least have a breakeven scenario. So, in this case, if the storage unit owner gives a nod for construction of 100 storage units, he has to spend some money on this. If he wants to have additional units, additional costs are incurred. He would be interested in doing this only when the rental prices exceeds the total cost associated with adding addition units, or in simple words, he should gain something out of this. He'll be more interested in having the Return on Investment as quickly as possible. If a cost x has incurred to him in adding 100 additional units, and he fixes a rent equals to 0.1x for the storage seekers, he'll get the return on investment within 10 months. The quicker he gets the better it is for him. Therefore he will add 100 additional units if and only if the rents are hiked and the return on investment is quickest.

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