Question

Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight. If the marginal cost of operating one room for one night is $30 and a customer is willing to pay $60 for the night, the hotel manager should:

Answer 1

Please see options missing from the original question :

A. rent the room because the marginal benefit exceeds the marginal cost.

B. rent the room because the marginal benefit exceeds the average cost.

C. not rent the room because the marginal benefit is less than the marginal cost.

D. not rent the room because the marginal benefit is less than the average cost.

Answer:

A. rent the room because the marginal benefit exceeds the marginal cost.

Explanation:

Although , the original operating cost of a room per night is $100 (($10,000/100), but since there are idle capacity (empty rooms), the company will be better off by an incremental profit of $30 ($60 -$30) per room by offering to sell empty rooms for $60 per room, using a marginal (incremental ) approach.