Erin and Kyle Kouri operate a highly regarded Bed & Breakfast inn located in the historic district of Montpelier, Vermont. The inn has six rooms—each room has its own theme and rents for $180 per day. While the rooms are usually occupied on weekends (Friday, Saturday, and Sunday), it is rare for more than two rooms to be occupied during the week. This past week, Erin received a telephone call from a customer who wishes to rent four rooms from Monday afternoon through Thursday morning (three nights). The customer and her three friends are planning a vacation and picked Montpelier for its recreational and cultural activities. However, the customer indicated that $180 a day was beyond their budget. She suggested a flat sum of $200 per person for the entire stay. She also requested that each person be accommodated in a separate room.

Erin and Kyle are not quite sure what to do. If they do not accept the customer’s offer, then the rooms will remain empty. In addition, Erin and Kyle figure that it only costs them $10 per day to clean a room and change the linens. On the other hand, Erin and Kyle are concerned about renting the rooms for less than 50% of the standard rate.

Required:

a. Does Erin and Kyle’s decision deal with excess supply or excess demand?

b. What should Erin and Kyle do?