Have you ever walked into a restaurant for lunch and found it almost empty? Why, you might have asked, does the restaurant even bother to stay open? It might seem that the revenue from the few customers could not possibly cover the cost of running the restaurant.

In making the decision whether to open for lunch, a restaurant owner must keep in mind the distinction between fixed and variable costs. Many of a restaurant’s costs-the rent, kitchen equipment, tables, plates, silverware, and so on-are fixed. Shutting down during lunch would not reduce these costs. In other words, these costs are sunk in the short run. When the owner is deciding whether to serve lunch, only the variable costs-the price of the additional.

An operator of a miniature-golf course in a summer resort community faces a similar decision. Because revenue varies substantially from season to season, the firm must decide when to open and when to close. Once again, the fixed costs-the costs of buying the land and building the course are irrelevant  making this decision. The miniature-golf course should be open for business only during those times of year when its revenue exceeds its’ variable costs.

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