probably see many firms like this one if you drove through small towns in
any part of Canada.
Applying Economic Concepts 9-2
The Parable of the Seaside Inn
Why do some hotels stay open during the off-season, even
though they must offer bargain rates that do not even cover
their “full costs”? Why do the managers of other hotels allow
them to fall into disrepair even though they are able to attract
enough customers to stay in business? Are the former being
overly generous, and are the latter being irrational penny-
pinchers?
To illustrate what is involved, consider an imaginary hotel
called the Seaside Inn. Its revenues and costs of operating
during the four months of the high-season and during the eight
months of the off-season are shown in the accompanying
table. When the profit-maximizing price for its rooms is charged
in the high-season, the hotel earns revenues of $580 000 and
incurs variable costs equal to $360 000. Thus, there is an
“operating profit” of $220 000 during the high-season. This
surplus goes toward meeting the hotel’s annual fixed costs of
$240 000. Thus, $20 000 of the fixed costs are not yet paid.
The Seaside Inn: Total Costs and Revenues ($)