When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which of the following principles is are) best demonstrated? i) Fixed costs are sunk in the short run.
Ii) In the short run, only fixed costs are important to the decision to stay open for lunch.
Iii) If revenue exceeds variable cost, the restaurant owner is making a smart decision to remain open for lunch.

Question

Quizplus · Accepted Answer

Option i) states that fixed costs are sunk in the short run, meaning that they cannot be modified in the short run. Therefore, even if the restaurant is not generating enough revenue from lunch service, it has to pay for its fixed costs such as rent, salaries, utilities, etc. This makes it difficult for the restaurant to make a profit from lunch service alone.

Option iii) states that if the revenue from lunch service exceeds the variable cost (such as food, labor, and other operational costs), the restaurant owner is making a smart decision to remain open for lunch. This is because variable costs can be adjusted in the short run, which allows the restaurant to cover its variable costs and make some profit.

Option ii) is not entirely true because in the short run, both fixed and variable costs are relevant for the decision to stay open for lunch. However, option iii) gives a better account of the situation.

When a Restaurant Stays Open for Lunch Service Even Though