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 shoulda.rent the room because the marginal benefit exceeds the average cost. b.rent the room because the marginal benefit exceeds the marginal 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 1

Answer:

In this case,the correct answer would be option b. or rent the room because the marginal benefit exceeds the marginal cost.

Explanation:

In Microeconomics or Production Economics,one of the basic rules of profit maximization states that the additional revenue or benefit obtained from the sale of an additional unit of output(Marginal Benefit,MB) is equal to the incremental cost incurred by the firm or company to produce that particular unit of output(Marginal Cost or MC).Now,in this case the MB is greater than the MC for renting one more room,implying that the hotel can continue to rent the rooms until the MB and MC of renting rooms are equal and profit is maximized.If the MB is greater than the MC,it also indicates that the firm can increase its overall profit because the marginal profit(MB-MC) or MP is still positive and the total profit from renting rooms can still increase.Therefore,attracted by higher prospects of profit,the hotel will continue to rent the rooms until the MP is zero or MB is equal to MC and hence,the total profit from renting rooms is maximized.