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?

Answer 1

The information provided in the case indicates that the Occupancy rate is more in summer than in winter. This suggest that the demand for resort is higher in summer and when demand is higher we generally believe that it is inelastic because consumers are willing to pay a higher price to occupy a room or accommodate in the resort.

When demand is inelastic it is more profitable to charge a higher price because consumers are reluctant to go elsewhere. Therefore charging the higher price in winter when the Occupancy rate is relatively lower is not a profit maximizing decision. The resort should be charging a higher price in summer as reduction in the quantity demanded will be lower than the increase in the price and therefore the revenue will be higher. With same cost structure in summer and winter, the profit will be higher in summer.