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Submitted By fabianchia86
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Question 1
Why might a restaurant charge very high prices for wine and bottled water yet quite reasonable prices for food?
When a customer is considering which restaurant that he/ she will visit, most people would actually look at the price of the foods or meals that the restaurant is providing. As the foods are the main courses that a restaurant is providing, restaurant may set the price of the food at a reasonable price to attract customer into the restaurant. But by setting the food at a reasonable price, restaurant might only be able to mark up 10% of the profit margin. Unlike for bottled water or wine, it is a complement goods that will be consumed with the food. Hence, restaurant might be able to mark up the prices of the drinks to 30% to 50% of the profit margin. In most of the situations, customers would want to have a drink with his meal. Besides that, it is a natural human’s reaction that most individuals will not remember to check the prices of the drink. Hence, when a customer is ordering a meal, the customer will buy the drink in the restaurant, as there is no alternative substitute of the drinks in a restaurant. In fact, there is a least possibility that the customers will bring along drinks with him. There is also another situation whereby a restaurant is selling beef steak, and normally red wines is a compliments of beef steak, thus it is a must that customer will need to order the red wine. Base on the situations mention above, restaurant is able to earn extra profit from selling drinks. As there are no substitutes of drinks in the restaurant, the customer’s demand of drinks is consider inelastic.
Figure 1 shows an inelastic demand.

As shown on the diagram, the prices of the drinks are increased by 13.33%, the demand quantity consumed is decreased by 10.53%. Price elasticity demand is 0.79, hence, it is consider an inelastic demand as the

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