ECO402 Assignment 2 Spring 2021 – Assignments – Solution VU

ECO402 Assignment 2 Spring 2021 – Assignments – Solution VU

ECO402 Assignment 2 Spring 2021

ECO402 Assignment 2 Spring 2021 solution idea:

The Case Since its emergence in the year 2019, the COVID-19 has affected the economic activities in the whole world. The tourism industry is one of the major industries, which has been affected very badly due to the COVID-19. Due to the lockdowns and travelling bans, people are not going out for vacations and other activities. This is the major reason behind the low earnings of the hotels and restaurants. Let’s assume two hotels, Pearl International Sawat and Premier International Sawat, which are located in Sawat, a city in KPK province, Pakistan. Both of these hotels faced the financial constraints due to COVID-19 restrictions.

In result of the yearly audit of the financial year (2020-21), following are the details of the labor cost, opportunity cost of capital and revenues of these hotels.


Hotel Name

Pearl International Sawat

Premium International


Revenues ( R )

40 million rupees

50 million rupees

Labor cost (wl)

30 million rupees

10 million rupees

Opportunity cost of capital

and revenues (rk)

20 million rupees

20 million rupees


In light of these figures, answer the following questions: –

a.       Identify the market structure, in which these hotels fall?

Perfectly competitive market


b.      Calculate the economic profit for both of these hotels


Economic profit of pearl international sawat (π) = R – wL – rK

= 40-30-20

= -10

Economic profit of permium internatonal sawat (π) = R – wL – rK

= 50-10-20

= 20


c.       Which of these hotels, is going out of the business, due to financial conditions?


Pearl international sawat

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