Suppose a movie theatre stays open late at night even though few people attend screenings this late.Which of the following principles are being demonstrated?
(i) fixed costs are sunk in the short-run
(ii) in the short-run, only variable costs are important to the decision to stay open for late evening showings
(iii) if variable exceeds revenue, the theatre owner is making a profitable strategic decision to remain open late into the night

Question

Quizplus · Accepted Answer

The principle of fixed costs being sunk in the short-run implies that the theatre owner has already invested in fixed costs and cannot recover them in the short-run, so they should not be taken into consideration when making short-term operational decisions like whether to stay open for late screenings. This principle is being demonstrated in the scenario described.

The principle that in the short-run, only variable costs are important to the decision to stay open for late showings is also applicable here. Variable costs are costs that vary with the level of output, such as the cost of hiring an employee to work late or the cost of electricity. These costs should be compared to the revenue generated from the late screenings to determine if it makes sense to stay open. This principle is also being demonstrated in the scenario described.

However, the principle that if variable costs exceed revenue, the theatre owner is making a profitable strategic decision to remain open late into the night is not applicable in this scenario. If variable costs exceed revenue, then the theatre owner is not making a profit and should consider closing earlier to save costs.

Therefore, the correct answer is A) (i) and (ii) only.

Suppose a Movie Theatre Stays Open Late at Night Even