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Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight
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:
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.
Expert Solution
The correct answer to the given question is option a) Rent the room because the marginal benefit exceeds the marginal cost.
In the given scenario, the marginal cost for operating one room for one night (i.e. $30) is less than the marginal revenue or marginal benefit of $60. Hence, the hotel manager should rent the room because it will enable the hotel to earn a net marginal benefit of $30 (i.e. $60 - $30) per room.
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