Therefore, the hotel stays open during the whole year by
offering off-season bargain rates to grateful guests. Indeed, if it
were to close during the off-season, it would not be able to
cover its total fixed and variable costs solely through its high-
season operations.
We have not yet discussed firms’ long-run decisions, but you
can get a feel for the issues by considering the following
situation. Suppose the off-season revenues fall to $190 000 (but
everything else remains the same). The short-run condition for
staying open, that total revenue (TR) must exceed total variable
cost (TVC), is met for both the high-season and the off-season.
However, since the TR over the whole year of $770 000 is less
than the total costs of $780 000, the hotel is now making losses
for the year as a whole. The hotel will remain open as long as it
can do so with its present capital—it will produce in the short
run. However, it will not be worthwhile for the owners to
replace the capital as it wears out.
If the reduction in revenues persists, the hotel will become one
of those run-down hotels about which guests ask, “Why don’t
they do something about this place?” But the owners are
behaving quite sensibly. They are operating the hotel as long as
it covers its variable costs, but they are not putting any more
investment into it because it cannot fully cover its fixed costs.
Sooner or later, the fixed capital will become too old to be run,
or at least to attract customers, and the hotel will be closed.