Question

A restaurant has three types of customers. A third of its customers, Type A, are willing to spend $5 on an appetizer but only $2 on a dessert. Another third, Type B, are willing to spend $3.50 on an appetizer and $3.50 on a dessert. The remaining third, Type C, are willing to spend only $2 on an appetizer but $5 on a dessert. All three types are willing to spend $10 on the main course. It costs the restaurant a constant $2 to prepare an appetizer or a dessert, and $7 to prepare the main course.

Which is optimal for the restaurant, to offer appetizers and desserts with separate prices on the menu, or to offer them only as a complete meal, tied in with the main course?

Answer 1

Answer : The optimal solution for the restaurant is to offer $3.50 for appetizers and $3.50 for desserts.

Because the cost of restaurant for making appetizers is $2 and for making dessert is also $2. Now if the restaurant charge $5 on appetizers then the restaurant earns abnormal profit on appetizers but in this case the restaurant has to charge only $2 for desserts which is equal to the cost level. So the restaurant earns zero economic profit on desserts. Hence this condition is not optimal for the restaurant. Similarly, if the restaurant charge $2 for appetizers then earns zero economic profit but in this case the restaurant earns abnormal profit on desserts by charging $5. But this condition is also not the optimal condition for the restaurant.

Now if the restaurant charge $3.50 for appetizers and $3.50 for desserts then in both items the restaurant earns positive economic profit. And hence this condition is optimal for the restaurant to charge seperately or tied them in main course as a complete meal.