question archive A profitable motel may need to shut down in the long run if the land on which it is located became extremely valuable due to surrounding economic development
A profitable motel may need to shut down in the long run if the land on which it is located became extremely valuable due to surrounding economic development
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A profitable motel may need to shut down in the long run if the land on which it is located became extremely valuable due to surrounding economic development. When the land around the motel increased with the development, it also increased the land around that land. This will increase property taxes and could even alter building zones. According to Perez in 2021 a hotel that had been successful for more than 22 years had to close due to the fact that the hotel is not able to prevent the increase in its lease. The hotel wouldn’t be able to afford the increase in the lease due to the local area becoming extremely valuable. For this company they realized that the marginal revenue was going to be lower than the marginal variable cost. This means that rooms prices would be lower than needed for the changes in the lease, which would mean they need to shut down.
For example, if you build your car wash in the middle of field, the permit for that would more than likely be authorized. However, if you live a heavily populated city, the zoning will have changed, and you may not be able to have that business there. There could be several reasons, one may be the fact that it is not zoned for that type of business, or it could be because the chemicals that are used to wash the cars are not authorized to be around homes within 200 feet.
The motel may also decide to shut down if the land could be sold at a price in which the owner would like. The motel owner could then take the funds to purchase other motels in different areas, so he could expand. The city plan could also include new motels will be becoming available in the future around that area and looking at costs may decide that this motel wouldn’t be able to compete with the new motels long term.
Reference:
Perez, L. (2021). West Hollywood’s The Standard Hotel Shutting Down. Retrieved from https://www.hollywoodreporter.com/lifestyle/style/west-hollywoods-the-standard-hotel-shutting-down-4120141/
Reply #2
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?
A profitable motel might shut down due to the amount of total profit they could gain from selling. The owner could sell the motel to help set themselves up for retirement or because they are entrepreneurs. A few of the costs involved in making the decision to shut down are total cost which comes from adding the variable cost and the fixed cost together. The reason you would want to know total cost is because it would allow you to see how much a profit you could gain after paying off all expenses that you had incurred along the way.
[1] Original Forum 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?
