Question

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?

Answer 1

A profitable motel may shut down if the land it is located on becomes extremely valuable due to surrounding economic development. The decision to shut down involves considering costs such as opportunity cost, relocation cost, labor cost, and fixtures and furnishings.

Step-by-step explanation:

In the long run, a profitable motel may shut down if the land it is located on becomes extremely valuable due to surrounding economic development. This is because the motel can potentially earn a higher profit by selling the land to developers than by continuing with its current operations.

The decision to shut down a profitable motel involves considering the costs involved. These costs include:

1. Opportunity cost: The potential profit that can be earned by selling the land to developers.
2. Relocation cost: If the motel decides to move to a new location, there will be expenses associated with finding a suitable property and relocating.
3. Labor cost: If the motel shuts down, employees may lose their jobs, resulting in potential severance and unemployment expenses.
4. Fixtures and furnishings: The motel will need to consider the cost of moving or selling its existing fixtures and furnishings, or the cost of purchasing new ones if it decides to relocate.

Answer 2

The opportunity costs may be too high, and the motel may not yield high enough returns to offset them.

Opportunity costs is the money you do not earn for choosing one alternative investment or action over another. In this case, the cost of the land is probably very high and the motel (or any other business) might not be making as much money from their regular operations as they could from selling the land and using that money for another investment.

A business will shut down when their economic costs exceed their revenue.