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Micro Week 6 DQR
Greetings Class and Professor,
A profitable motel on extremely valuable land may go out of business for many reasons. One of the main reasons is that they are experiencing negative economic profits. The motels implicit costs rise as the land’s value rises since by keeping the business open rather than selling it, they are missing out on the money they could get from this land. Therefore, keeping the motel open is costing them more than the profits they are making. Due to the motel being established on extremely valuable property, it could be expected for new competition such as other motels, hotels and Airbnb’s to cause financial suffering. Additionally, as the surrounding area continues to expand, the cost of living will also increase. With an increase on cost of living this brings higher explicit costs such as wages, salaries and utilities. The motel could make more money by closing down since they would be better off if the costs became too high and the economic profit turned negative. Before a business decides to shut down, there are many costs they need to take into consideration. These costs consist of taxes, debts (any leased items), moving costs (furniture), labor wages, and fees from company contracts such as cleaning, water and electrical companies.
When an area becomes extremely valuable because of economic development it can attract more consumers which will eventually raise prices of goods and services in the surrounding area. In doing so, it can make it harder for the motel to stay gaining revenue due to the increases in prices. New development can also attract new firms in the industry, such as new motels or hotels which can take away from their profits causing losses. If losses become so large it would only make sense to go out of business. In doing so it might be better for the owners of the motel because the land their motel sits on is extremely valuable so nearby developers may offer to buy the motel for the land it sits on for more than it is worth. There are many costs that can be involved in making the decision to shut down. One of them being the wages being paid for labor. Another factor in determining going out of business would be the overhead costs to keep the business running smoothly and in a way that keeps them profitable. If price drops below a firm’s average variable cost the best strategy for the firms is to shut down, reducing its output to zero. (Rittenberg, pg. 235).
Rittenberg, L., & Tregarthen, T. (2009).Principles of Microeconomics. Irvington, NY: Flat WorldKnowledge, Inc.