Output should optimally be set where mr and mc are

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Output should optimally be set where MR and MC are equal; this occurs where TR – TC = PROFIT  is at a maximum. 164. Suppose that on a Saturday night at 10pm a large hotel has 300 vacant rooms, with little expectation  of renting them at such a late hour on a weekend. A traveler comes in the door, looking a bit down  on his luck, and asks how much a room will cost. Since he can’t afford the normal rate of $150, the  night manager decides to let him stay in the room for only $40. Is it likely that this decision  reduced, or increased, the hotel’s profits? Explain your answer. ANSWER M, A Marginal analysis can help answer this question. The hotel’s marginal revenue in this case is $40;  what is the marginal cost? It is the cost of cleaning the room and putting in clean towels and sheets  after the traveler leaves. Since this is likely to be less than $40, this decision probably did increase  the hotel’s profits. 165. Tour companies and cruise lines often offer last minute fares that are far below the prices paid by  customers who have booked their trips far in advance. Use marginal analysis to explain this pricing  tactic. ANSWER D, A The answer rests on the marginal cost and the marginal revenue of the pricing tactic. If a cruise ship  still has vacant cabins within a few days of its departure, it is unlikely that they will be sold at the  regular price. If the cruise line can sell those cabins, even at a steep discount, they will get some  marginal revenue; as long as the marginal revenue exceeds the marginal cost of having the extra 
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254 Chapter 7/Output, Price, and Profit: The Importance of Marginal Analysis passengers on the ship, the firm’s profits are increased. Since most of the costs of running a cruise  ship are fixed costs, i.e., they do not change with the number of passengers on board, then it is  likely that this strategy will increase the cruise line’s profits. 166. Using marginal analysis, explain why many restaurants and coffee shops offer low-cost refills on  beverages (for example, a shop may charge $1.50 for a cup of coffee and only $.50 for a refill). ANSWER M, A The cost of the beverage includes the cost of serving it, and of collecting and cleaning the cup or  glass (or the cost of the cup, if it is disposable). The marginal cost of the refill is just the cost of the  beverage itself, since the customer uses the same cup. Thus, the marginal cost of the refill is lower,  and hence the profit-maximizing firm will charge a reduced price for it.
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