Why might a profitable motel shut down in the long run if the land on which it is located becomes extremely valuable due to surrounding economic development? What kinds of costs are involved in making a decision to shut down?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

The only logical explanation as to why the motel wants to shut down is because it can no longer make money. Since the value of land has gone up, there is a high probability that the landowner will increase the rent. That means that the cost of running the motel is likely to soar and eat into the firm’s profits. Even though the motel can transfer the costs to the customer by increasing rates, it can only do so up to a certain point. Since the area is experiencing rapid economic development, the number of motels is likely to double. The expected surge in competition means that the motel cannot set the boarding price too high because doing so will make clients go elsewhere. Furthermore, the motel management may have to spend more on advertisement and renovation to stay ahead of the new establishments. These costs also reduce the firm's earnings.

The costs involved in shutting down the motel are variable and fixed expenses. In the long run, fixed costs like rent change. On the other hand, variable costs are expenses that change with the production levels. For example, if the number of guests visiting the motel reduce, the cost of room maintenance is also likely to reduce. This expense is an example of a variable cost. Other examples of variable expenses include promotional and renovation costs. Since both variable and fixed costs are expected to rise, the motel is unlikely to make money beyond the break-even point. As a result, it has to close down because it will not make profits in the long run.

Approved by eNotes Editorial Team
Soaring plane image

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial