International Hotels operates many hotels
throughout the world. One of its hotels is facing difficult times because several
new competing hotels are opening.
To accommodate its flight personnel, Air Canada has offered International
a contract for the coming year that provides a rate of $50 per night per room for
a minimum of 50 rooms for 365 nights. This contract would assure International
of selling 50 rooms of space nightly, even if some of the rooms are vacant on
some nights.
The International manager has mixed feelings about the contract. On several
peak nights during the year, the hotel could sell the same space for $100 per
room.

1. Suppose the contract is signed. What is the opportunity cost of the 50
rooms on October 20, the night of a big convention of retailers when
every midtown hotel room is occupied? What is the opportunity cost
on December 28, when only 10 of these rooms would be expected to
be rented at an average rate of $80?
2. If the year-round rate per room averaged $90, what percentage of
occupancy of the 50 rooms in question would have to be rented to
make International indifferent about accepting the offer?