What time should a business close for the day?

This activity is perfect for a Principles of micro course.
Students should know the profit-maximizing rule, MR = MC and understand the difference between marginal, fixed and average cost. 
There are no limitations on class size.
The activity takes 8-12 minutes depending on the time allotted to the group discussion and the debrief.

Overview

This is an application of marginal thinking in the theory of the firm. The idea came from, "Using Music to Teach Agricultural, Applied, and Environmental Economics" by Matthew C Rousu, Mark Melichar, Bailey Hackenberry in the Journal of Applied Economics Teaching Resources (2021). Too often the theory of the firm is taught abstractly. This exercise uses the classic SemiSonic song, "Closing Time" as a hook. However, the premise is familiar to anyone who has wondered why some businesses open early and others stay open late.

Expected Student Learning Outcomes

 

Students will apply the marginal revenue = marginal cost rule to profits/losses. At the end of this activity the students will be able to:

Apply marginal analysis to a real world example.
Understand that a firm will only remain open when the MR > MC.

 

Information Given to Students

 

Prompt: If a bar has total control over when they choose to close for the night, why would a bar choose to close down at 2:00 A.M. instead of 3:00 A.M.?

Instructors should play "Closing Time" by Semisonic while the teams are discussing the prompt and considering their answers.

Here is the link: https://www.youtube.com/watch?v=xGytDsqkQY8. 

Answer this question:

You are the co-owners of a bar that is open from 5 pm to 3 am. You have noticed that revenues during the last hour of operation are less than those at any other hour and, indeed, are less than average total costs. Should the bar close at 2 am instead?

A. Yes. We own the bar as an investment property. Running when revenues are falling makes no sense.
B. No. We enjoy tending bar and there are implicit benefits that make average economic profits positive.
C. Not necessarily. Stay open until 3 if revenues during the last hour exceed the costs of being open that last hour.
D. Yes. It will be easier to find good workers if we keep more reasonable hours so closing at 2 would be wise.

 

Prefatory remarks:
I have an activity that I hope you will enjoy! Have you ever thought about why some businesses open early and others stay open late. Or, have you wondered why some businesses are closed on Sunday and others choose to close on Monday? After this exercise you will understand how economists attempt to answer these questions.
Answers for the question:

Notice that, while C is the runaway best answer, A elicits a student misconception and B and D are somewhat defensible.

Summary remarks:

The key to understanding how businesses operate in the real world is thinking about marginal costs and marginal benefits. While it is often tempting to think of average or total costs as conveying more information than marginal cost, this is simply not true. Marginal costs can be calculated in real time, whereas the firm must wait weeks of month to compile average and total costs – a time delay that causes a business to miss out on profitable opportunities.

Your friend hasn't studied economics and says he will open the bar until 3:00 AM because it will mean more sales. Which of the following concepts should you use to best convince them that this may be a mistake?

Marginal cost
Fixed cost
Variable cost
Average cost

Answer: A firm should consider the extra money coming in (MR) versus the extra costs of operating (MC). Economists utilize marginal thinking to help them weigh the costs and benefits