Question

The restaurant industry is highly competitive. The pandemic has likely reduced the demand for restaurant meals. It has also likely raised the fixed costs of a typical restaurant (because owners have needed to reconfigure seating and install new ventilation systems).

a. What will these two developments do to the equilibrium price and quantity in the market for restaurant meals? [15 points]

b. What will these two developments do to the number of meals produced and the profits of a typical restaurant in the short run? [15 points]

Answer 1

A.

Since the consumers are aversive to eating restaurant food due to the pandemic, there will be a decrease in demand. At the same time, since there is a rise in cost of production for the producers, there would occur a decrease in supply.

Now, three cases are possible depending upon the magnitude of shift in demand and supply curves.

In case 1

The equilibrium quantity declines and the equilibrium price remains the same, i.e. lesser is demanded and sold at the existing price

In this case

Equilibrium price and equilibrium quantity get reduced, i.e. less is demanded and sold at lesser prices

In case 3

Equilibrium price Increases but Equilibrium Quantity decreases, i.e. lesser is sold at higher price

B. As we have seen above, lesser output is sold and demanded, thus the number of meals produced is reduced. We also observe a rise in the cost of production which will ultimately decreases the profit margins of the sellers in the short run

We know Profit= Total Revenue - Total cost

So as, revenue falls and cost increases, profit must fall.