A New Hampshire resort offers year-round activities: in winter, skiing and other cold-weather activities; and in summer, golf, tennis, and hiking. The resort’s operating costs are essentially the same in winter and summer. Management charges higher nightly rates in the winter, when its average occupancy rate is 75 percent, than in the summer, when its occupancy rate is 85 percent. Can this policy be consistent with profit-maximization? Explain.

Question

A New Hampshire resort offers year-round activities: in winter, skiing and other cold-weather activities; and in summer, golf, tennis, and hiking. The resort’s operating costs are essentially the same in winter and summer. Management charges higher nightly rates in the winter, when its average occupancy rate is 75 percent, than in the summer, when its occupancy rate is 85 percent. Can this policy be consistent with profit-maximization? Explain.

Answer 1

To determine if the policy of charging higher nightly rates in winter while having a lower occupancy rate can be consistent with profit-maximization, we need to consider the revenue and cost implications.

In this scenario, the resort's operating costs remain the same in both winter and summer. This means that the costs associated with providing the services - skiing, cold-weather activities, golf, tennis, and hiking - do not change based on the season. Therefore, the expenses incurred by the resort are not affected by the occupancy rate or the specific activities offered.

However, the revenue earned by the resort does vary depending on the season and the occupancy rate. Charging higher nightly rates in winter, with an occupancy rate of 75 percent, implies that the resort is generating higher revenue per occupied room during this season. Conversely, in the summer, where the occupancy rate is higher at 85 percent, the resort is generating lower revenue per occupied room due to the lower nightly rates.

To assess the profit-maximization aspect, it's important to understand the relationship between revenue and expenses. If the revenue generated during the winter season, despite the lower occupancy rate, is sufficient to cover the resort's operating costs and still generate a profit, then the policy can be consistent with profit-maximization. This could be the case if the higher nightly rates in winter significantly offset the lower occupancy rate.

In essence, as long as the higher revenue generated during the winter season can compensate for the lower occupancy rate compared to summer, the resort can still achieve profit-maximization. It's important for management to analyze their revenue and expense figures to ensure this balance exists and to make informed decisions about pricing and occupancy rates throughout the year.