Assume that you own a lake house. Unfortunately your job will require that you spend the summer on the road and you won't be able to enjoy it. You decide that you will rent it out for the summer while you are working
The mortgage payment on the lake house is $1000 per month and the upkeep and maintenance if it is occupied is $200 month but zero if it is not rented. What is the minimum rent that you would be willing to receive and why? What information is irrelevant in your decision? Explain.
The minimum rent that you should be willing to receive would be $200 . Since this is in a sense your variable cost then this is all you would need in order to make it worthwhile to rent out. Anything less than $200 would make it more attractive to leave un-rented. The $1000 per month is irrelevant in your decision because it represents your fixed cost.
You might also like to view...
Which of the following statements is true?
A) Marginal analysis is a key tool used while optimizing in levels. B) Comparative statics is a tool that can be used in both optimization in levels and optimization in differences. C) Marginal analysis is the comparison of economic outcomes before and after some economic variable is changed. D) Comparative statics involves calculating the incremental cost of moving from one alternative to the next best alternative.
Refer to the scenario above. Suppose Pat can impose a fine of $70 if Joe chooses to keep the money and the cost of imposing such a fine to Pat is $10. Which of the following is likely to happen if Pat is known to be vengeful?
A) Joe will choose to split the money into two parts if Pat gives it to him. B) Joe will choose to keep the entire money for himself if Pat gives it to him. C) Pat will not give the money to Joe. D) An unique equilibrium will not occur.