Question

In: Economics

A friend owns a hotel that gets a lot of seasonal business. The average total cost per day of running the hotel is $75

A friend owns a hotel that gets a lot of seasonal business. The average total cost per day of running the hotel is $75. She tells you that during the off-season (when there are a lot of empty rooms), she had someone offer her $70 for a room. She indignantly tells you she turned the offer down since it was less than her average cost. Was that a good decision? Explain your answer in detail.

Solutions

Expert Solution

Ans) If price is above ATC, firms earn positive economic profit. If price is below ATC, firms earn negative economic profit but they will continue to produce as long as price is above AVC because it will minimise loss. And if price is below AVC, firm should shutdown because by continuing to produce, it will incur more loss.

Now, here, since ATC is $75 and price is $70, she could have minimized her loss by accepting that offer if the price were above AVC. So, assuming that price offered was above AVC, it wasn't wise to decline the offer.

In the graph, loss when produce means the loss when she would have accepted the offer. And loss when shutdown means the loss when she declined the offer.


Related Solutions

If a firm has a total fixed cost of $75 and an average variable cost of...
If a firm has a total fixed cost of $75 and an average variable cost of $35 for producing 10 units of output, the average total cost would be: If a firm has an average total cost of $55 and an average fixed cost of $10 for producing 5 units of output, then the total variable cost will be:
Output tables/day Total cost Variable cost Average Total Cost Average variable cost Marginal Cost 0 $250...
Output tables/day Total cost Variable cost Average Total Cost Average variable cost Marginal Cost 0 $250 1 350 2 430 3 490 4 570 5 670 6 820 What are the fixed costs of production measured in dollars? For 6 tables, what is the average fixed cost, average variable cost, and the marginal cost?
] The average cost per night of a hotel room in San Francisco is $550 with...
] The average cost per night of a hotel room in San Francisco is $550 with a standard deviation is $150 based on a sample of 50 hotel room rates. a) Clearly state what the random variable in this problem is? b) What is an appropriate distribution to be used for finding the confidence intervals for this problem and why? c) Construct a 99% confidence interval estimate on the mean of all hotel room rates. d) What is the 90%...
A business that produces color copies is trying to minimize its average cost per copy​ (total...
A business that produces color copies is trying to minimize its average cost per copy​ (total cost divided by the number of​ copies). This average cost in cents is given by ​f(x)equals=0.00000093x^2−0.0146+60​, where x represents the total number of copies produced. ​(a) Describe the graph of f. ​(b) Find the minimum average cost per copy and the corresponding number of copies made.
1. The long run average total cost shows what happens to average (per unit) total cost...
1. The long run average total cost shows what happens to average (per unit) total cost as a firm grows in size (adds more capital or increases its plant size). True or false? 2. In the short run, at least one input is variable and one input is fixed. True or false? 3. If marginal product is less than average product, average product must be falling. True or false? 4. In the long run, all inputs are variable. True or...
Illustrate the per unit cost graph. You must include average total cost, average fixed cost, average...
Illustrate the per unit cost graph. You must include average total cost, average fixed cost, average variable cost and marginal cost.
12 - What is target cost per​ unit? A.Target cost per unit is the average total...
12 - What is target cost per​ unit? A.Target cost per unit is the average total unit cost over the​ product's life cycle. B.Target cost per unit is the average total unit cost over the contribution margin ratio. C.Target cost per unit is the contribution margin per unit over the average total unit cost. D.Target cost per unit is the variable unit cost over the​ product's life cycle. 13 - What is value​ engineering? A.Charging different prices to different customers...
Do US adults consume an average of more than 75 grams of fat per day? According...
Do US adults consume an average of more than 75 grams of fat per day? According to a study of 600 adults in a scientifically designed study, the sample mean was 77.23 grams with sample standard deviation 33.47 grams. Do all the steps of a hypothesis test using normal theory methods, including finding the p-value, and write the conclusion in context.
A recent study claims that business travelers spend an average of $39 per day on meals....
A recent study claims that business travelers spend an average of $39 per day on meals. A sample of 15 business travelers found that they had spent an average of $42 per day with a standard deviation of $3.78. If alpha =0.05, what is the claim, should we reject H0 or fail to reject H0, what is the test value, what is the alternate hypothesis?
Average total cost is important to a business because Multiple Choice a) It tells the firm...
Average total cost is important to a business because Multiple Choice a) It tells the firm what the profit per unit produced is. b) It always declines as more output is produced. c) It tells the firm what its fixed costs are. d) It is an indicator of the production function.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT