The Marriott Corporation operates many hotels throughout the world. Suppose one of its Chicago hotels is facing difficult times because of the opening of several new competing hotels.
To accommodate its flight personnel, American Airlines has offered Marriott a contract for the coming year that provides a rate of $50 per night per room for a minimum of 50 rooms for 365 nights.
This contract would assure Marriott of selling 50 rooms of space nightly, even if some of the rooms are vacant on some nights.
The Marriott manage has mixd feelings about the contract. on several peak nights during the year, the hotel could sell the same space for $100 per room.
1. Suppose tha Marriott manager signs the contract. What is the opportunity cost of the 50 rooms on October 20, the night of a big convention of retailers when every nearby hotel room is occupied?
What is the opporunity cost on December 28, when only 10 of these rooms would be expected to be rented at an average rate of $80?
2. I the year-round rate per room averaged $90, what percentage of occupancy of the 50 rooms in question would have to be rented to make Marriott indifferent about accepting the offer?
The opportunity cost is the profit that would be obtained if Marriot went with the next best alternative to the contract with AA.
On October 20, the next best alternative would be to sell this room to the attendees of the conventions. Since ...