A New Hampshire resort offers year-around 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 it occupancy rate is 85 percent. Can this policy be consistent with profit maximization? Explain.
The policy of charging higher nightly rates in the winter, despite a lower occupancy rate, can be consistent with profit maximization.
To understand why, let's consider the concept of marginal revenue and marginal cost. Marginal revenue is the additional revenue generated by selling one additional unit of a good or service, while marginal cost is the additional cost incurred to produce that additional unit.
In this case, the resort's operating costs are essentially the same in winter and summer, so we can assume that the marginal cost of providing an additional night's stay is constant regardless of the season.
Now, let's look at the occupancy rates. The resort has an average occupancy rate of 75 percent in the winter and 85 percent in the summer. This means that in the winter, the resort has more vacant rooms compared to the summer. By charging higher nightly rates in the winter, the resort is maximizing its revenue per occupied room.
Even though the occupancy rate is lower in the winter, the higher nightly rates can potentially generate enough additional revenue per occupied room to compensate for the lower number of occupied rooms.
In other words, the higher rates in the winter might offset the revenue lost from the vacant rooms, resulting in overall higher revenue and potentially higher profits for the resort.
Therefore, this policy can be consistent with profit maximization because it aims to maximize revenue per occupied room and potentially offset any revenue lost from the lower occupancy rate.
In order to determine whether the resort's pricing policy is consistent with profit maximization, we need to analyze the relationship between occupancy rates and profitability.
Let's consider the winter season first. The resort charges higher nightly rates during this time, indicating that they are capitalizing on the higher demand for winter activities such as skiing. However, the average occupancy rate during winter is lower at 75 percent.
On the other hand, during the summer season, when the resort offers golf, tennis, and hiking, they charge lower nightly rates. However, the average occupancy rate during summer is higher at 85 percent.
To assess profit maximization, we need to consider both revenue and cost factors. Assuming that the resort's operating costs remain the same throughout the year, we can focus on revenue.
In winter, even though the nightly rates are higher, the lower occupancy rate means that they are selling fewer rooms and generating less revenue. However, the higher nightly rates could counterbalance the lower occupancy to some extent, as each occupied room brings in more revenue.
In summer, the lower nightly rates attract more guests, resulting in higher occupancy and potential for increased revenue. The higher occupancy rate may compensate for the lower rates, leading to a higher overall revenue during the summer season.
Considering these factors, the resort's pricing policy may still be consistent with profit maximization. By setting higher rates during the winter season, they can potentially generate more revenue per occupied room. However, this assumption depends on the specific revenue-per-room calculations and whether the increase in rates outweighs the loss of revenue due to lower occupancy.
Ultimately, without knowing the exact revenue and cost figures, it is challenging to determine definitively whether the resort's pricing policy is consistent with profit maximization. However, their approach could be a strategic decision based on market demand and revenue projections.