Question

Why might a profitable motel shut down in the long run if the land on which it is located becomes extremely valuable due to surrounding economic development? What kinds of costs are involved in making a decision to shut down?

Answer 1

If land that a profitable motel is located on becomes extremely valuable due to surrounding economic development, it might be prudent for them to shut down due to the opportunity cost of keeping it open. As the value of the land goes up, the opportunity cost of operating the motel also goes up. Essentially, the price of the land is far more valuable and can be sold or utilized in a more efficient manner which would bring heftier profits than which the motel is currently making. In this sense, the opportunity cost is too high, which is why the motel should close.