Question

In tourist towns such as beach, some businesses and resorts stay open year round while others close. How to do fixed and variable costs affect their decision to close or stay open?

explain briefly how do 400 words or more

Answer 1

• To answer to this question we have to understand the shutdown point phenomena.
• Different business working in the same situation may take different decisions related to you either continue in the business or to shut down the business.
• If shutting down a business can reduce the variable cost to zero, and the firm has already paid the fixed expenditures, it will be giving losses even after closing the business.
• The major factor is is whether a firm can earn enough revenue to cover at least the variable cost for remaining the business open .
• Latest take the example of a hotel near a beach, suppose the hotel is taken on rent on contract for $5000 per month. Which is the fixed expenditure. And the maintenance of the hotel and the minimum of staff needs $2000 per month. If the hotel shut down, they still have to pay the rent but can get rid of of the variable cost that is the maintenance staff. If it shut down at this stage the loss will be of 5000 dollars per month.
• And if the business continues and earns the revenue of $ 5000 . The loss will be of 2000 dollars.
• Therefore we can understand that it in the short run, variable cost is the major factor for deciding to remain open or to close the business.
• We can say the shutdown point occurs whenever the marginal revenue drops below the marginal variable cost. And if the firm is producing more than one product, average marginal revenue drops below the average variable cost.
• If the firm is having diminishing marginal returns then also the form Kan plan to to close.