Question

Hank's is a local bar and nightspot. On weekends, it requires a $10 cover charge to defray the costs of the live musical acts Hank's brings in to play. This has worked wonderfully, as it generates capacity crowds and a long line of people waiting outside to enter. However, after the costs of the acts is considered, Hank still loses money on the weekends. How should Hank attempt to fix his unprofitability problem?

Answer 1

To avoid unprofitability to occur, the marginal revenue and marginal costs of the musical acts are equal or the marginal costs are higher. The marginal cost is $10, however the marginal revenue cannot be determined. The price needs to be increased to level where the marginal revenue and cost are equal. Hank is not keeping himself engaged in yielding the management effectively. In this scenario Hank should set price so as to fill capacity. If he raises the cover charge he would discourage some patrons. He could increase it until the line forming outside reduces into just a few people. Additionally, market research is very vita and should be aware what his competitors are doing and whether he can enhance his services. Unnecessary costs should be cut and also paying attention to the customer needs and their complaints as they form the vital part of the profits.