Economics Essays on Profits and shut down decisions

Profits and shut down decisions

When the land on which a motel is build becomes extremely valuable due to increase in economic development, the opportunity cost of keeping the motel in business than selling the land becomes high. As an area develops economically and diversified products and services are found in one area, many consumers are attracted to make all their transactions there (Goodall, 2013). The cost of goods and services, of course, increase due to increased demand. Costs like taxes might keep increasing. Other motels could be build and create a competition considering that the motel was previously a monopoly. If the motel continues to operate under these conditions, it means it will be operating under diseconomies of scale. The owner can do a profit analysis and find out that even if the motel is profitable, the gains associated with selling the land outweigh the profits of the motel.  For example, if a motel makes $150,000 profits per year and the land can be sold at $ 1500, 000, then it means a one-time transaction is equivalent to a profit of 10 years if the motel continues to operate. Also one cannot be sure about the future of business since continued economic development could bring down the profits. A lot more investment can be done with the lump sum of money, and this provides a great incentive to shut down the motel and sell the land.

The costs involved in a making decision to shut down the motel are labor costs and overhead costs. The total and fixed costs do not matter. What the owner of the motel considers here are the average costs. If the average costs of operating the motel are higher than the marginal revenue, it means the profitability of the motel continue to diminish instead of increasing when the owner invests more in the motel. This is a satisfying reason to shut down the motel.



Goodall, B. (2013). The economics of urban areas (Vol. 3). Elsevier.