Question

Patrick owns a café in Melbourne, serving coffee and table-service meals. When the café is full, it can seat 50 people, and Patrick hires 2 chefs and 4 waiting (serving) staff. His objective is to maximise profits from the café. When the café operates normally, he makes zero economic profit.

When COVID-19 restrictions are imposed, Patrick is only able to serve take away coffee. Patrick lays off all of his staff, and runs the café by himself.

A)Explain in words how the effects of the COVID-19 restrictions will affect Partick’s ability to maximise profits. Draw and label diagrams that show Patrick’s likely profits before and during the COVID-19 restrictions.

B)Under what circumstances would Patrick continue to operate the café, and under what curcumstances would he close the business? Draw two diagrams to support your explanation.

C)Suppose COVID-19 restrictions are lifted, allowing Patrick to serve meals to 20 people. Draw a diagram and provide a written explanation of the likely effects on lifting restrictions on Patrick’s level of output, costs, and profits.

D)Suppose the Australian Government, in an attempt to encourage economic recovery from COVID-19, reduces the minimum wage. How might this affect the operation of Patrick’s business? Discuss the arguments for AND against reducing the minimum wage to encourage economic recovery

Answer 1

a) Due to Covid-19, Patrick lays off all staffs and run the business by himself. Therefore, he has cut down the labour costs, which is a varisble costs. He is now serving only take away coffee and has dropped other menus due to staff shortage. Therefore, production and costs boh are have decreased now.

Profit earned by Patrick during lockdown would depend on his ability to generate revenues from selling coffee. If reduced total revenues is greater than present total costs, then Patrick may earn profits.

b) As long as P> Average variavle costs (AVC), Patrick can continue production as he can still cover variavle costs and a part of the fixed costs. In figure, as long as P2 is above or equal to AVC, production should be continued.

However if price charged for coffee is less than AVC curve, ie, P2 < AVC, then Patrick should close down the business.

c) As Patrick is now to serve 20 meals, his cost of operation increases. Source of revenues is also expanded. However, in the short run, he cannot manage to recruit all staffs worked before. Hence, he has to perform with a limited staff. Nevertheless, the revenue will increase definitely than that was during covid-19 restrictions. Output and costs both will increase. But Patrick may earn either normal profit or a very little positive profit until he can resumes his production capacity as earlier.

D) Decrease in minimum wage will reduce labour costs for Patrick. So, he can higher greater number of labour than before at previous costs. Hence, profit is likely to rise. Cost of business operation reduces. Employment increases in the economy as a rresult.

On the other hand, it is not good for economic welfare. Per capita income decreases and hence, the purchasing power of the workers earning lower wage. Therefore, it may negatively affect aggregate demand for goods and services of the economy.