Answer to Question #284793 in Microeconomics for Rose

Question

You are the manager of a fortune 500 hotel chain and must decide where to locate a new hotel. Based on tax considerations,your accounting department suggests that atlantic city is the best choice followed by las vegas. In particular your current year tax savings from locating in atlantic city are $4 million,but they are only $3 million in las vegas. Your marketing department, on the other hand has provided you with sales estimates that suggest that the present value of the gross (of taxes) operating profits from locating in atlantic vity are only $10 million but they are $14 million for las vegas. It will cost $14 million to build the hotel in either location. Ignoring all other considerations, where should you build the hotel? What are your firm's economic profits if you locate the hotel in atlantic city?

Answer 1

I would locate the hotel in Las Vegas because it gives an accounting profit of $3m. The calculation is as follows;

Accounting profit= (Tax saving+ gross operating profit)- cost of building the hotel

= (14+3)- 14

=$17-$14= $3m

Economic profit of locating the hotel in Atlantic City

Accounting profit= (Tax saving+ gross operating profit)- cost of building the hotel

(10+4)- 14

= $14-$14= 0

Economic profit = Accounting profit- opportunity cost ( best forgone alternative)

$= 0-$3= -$3m$