Question

Imagine a market with 100 restaurants: 99 restaurants have “normally able” chefs, who make $30k each. These restaurants make revenues of $300k, which is equal to all implicit and explicit costs (--> they make 0 economic profit). One restaurant has a very talented and unique chef, 1.5 as good as others. Their customers are willing to pay 50% more for meals there, which means the revenues for the restaurant are $450k. Under the assumption that the talented chef can move easily from one restaurant to another, how much does she get paid, and how much economic profit does the restaurant make that originally employs her?

Group of answer choices

$180k for chef, $0k for restaurant $

45k for chef, $135k for restaurant

$45k for chef, $0k for restaurant

$180k for chef, $300k for restaurant.

Answer 1

Solution:

Since this chef generates helps generate higher revenue, she must get paid more than what others are getting, that is more than $30k. Also, for each restaurant, $30k is chef cost, and total cost = $300k, other costs = 300k - 30k = 270k, so for the 100th restaurant as well other costs = $270k.

Now, since chef can move across different restaurants easily, and being unique, everyone will demand for her, till the firm is still earning 0 economic profit (and no economic loss). Then, the chef has the power to extract all surplus of a restaurant (can earn maximum possible from any restaurant she works with), and so no restaurant has incentive of hiring her (as they'll earn 0 profit anyway as with increase in revenue, cost increases by same). So, the amount chef receives is where economic profit for that specific restaurant is also 0.

So, $0 profit for restaurant is possible if:

Total revenue with chef = amount paid to chef + other costs

450k = amount to chef + 270k

Amount to chef = 450k - 270k = $180k

Thus, the correct option is (A).