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Question 1: Palm restaurants are considered the gold standard for steak houses, with over 25 global locations, most in the U.S. The menu is the same at all locations, but prices may differ. For example, in 2011, the price of a 9-ounce filet in one of the New York locations was $43, whereas in San Antonio, it was $41. You are an analyst that has been tasked with providing the fundamental economics underling Palm’s business.

Question 1.A: What market structure best characterizes an industry like the high-end steak house business. How do you think the demand for steak at high-end restaurants differs between New York and San Antonio?

1. Typically, the high end restaurants are located at strategic locations and without having a lot of competition in similar segment in near vicinity. Restaurants such as high-end steak houses are best characterized by Monopolistic Competition.

For the high end restaurant, if the prices are higher than the competition in similar category but different cuisine restaurant then the customers will choose other cuisine restaurants. New york will tend to have more competition compared to San Antonio and that why the demand for steak in New York is more elastic than the demand for steak in San Antonio.

Question 1.B: Palm’s corporate management reveals that labor costs are higher in New York than in San Antonio. Given that workers in the restaurant workers are higher on an “at will” basis and can be released at any time, what effect does this have on the marginal cost, average variable cost and average total cost?

1. Average total cost = Average Fixed Cost + Average Variable Cost

Labor an on will basis and they are not permanent employee and that’s why they can be categorized as a variable cost.

If the workers in restaurant are working that will increase Average Variable cost, Average   Total cost and Marginal cost. This relation is true other way around as well.

Question 1. C: Assume that variable and marginal costs are 20% higher in New York than in San Antonio, and that the own price elasticity of demand is -3 in New York and -4 in San Antonio. If the two locations are pricing optimally, by what percentage would we expect prices in New York to exceed those in San Antonio? In your analyst report, what recommendation on pricing would you offer to management in order to enhance shareholder returns? Hint: if X is 10% greater than Y, then X/Y = 1.1.

C.         Marginal Revenue = Price * [(1+Elasticity)/Elasticity]

For optimal pricing,

Marginal Revenue = Marginal Cost

        Marginal Cost = Price*[(1+Elasticity)/Elasticity]

=> Price = Marginal Cost * [(Elasticity/(1+Elasticity)]

For New York:

MCny = Pny[(1-3)/(-3)]

                MCny = (2/3)Pny

        For San Antonio:

MCsa = Psa[(1-4)/(-4)]

                MCsa = (3/4)Psa

Also given MCny = 1.2*MCsa 

(2/3) Pny = 1.2 [(3/4)Psa]

Pny = 1.35 (Psa)

Based on the formula, the price in New York is 35% higher than the price in San Antonio.