(6 marks) “The past eight months have been devastating for Hong Kong’s food and beverage industry as a result of anti-government protests and now, the coronavirus outbreak. A slew of fine dining restaurants have temporarily closed – the most recent being John Anthony, Theo Mistral by Theo Randall, Gaddi’s, Chesa and LH Group’s hotpor outlets, as well as many in Macau. Meanwhile, Hunter & the Chase, Bibo and Root Central are among the restaurants in Hong Kong to have closed permanently.” Source: Furniss, T. (2020, Feb 21). Coronavirus piles on misery for Hong Kong fine dining restaurants already hurting from months of anti-government protest. Style. https://www.scmp.com/magazines/style/news-trends/article/3051760/coronavirus-piles-misery-hong-kong. fine-dining Some restaurants chose to close temporarily during this period of pandemic, while some other restaurants did not do so. In your own words, explain this phenomenon within 100 words. Hint: You may refer to Mankiw Ch.14, p.275-276, “Near-empty restaurants and off- season miniature golf” to answer this question.

NEAR-EMPTY RESTAURANTS AND OFF-SEASON MINIATURE GOLF CASE Have you ever walked into a restaurant for lunch and found it almost STUDY empty? Why, you might have asked, does the restaurant even bother to stay open? It might seem that the revenue from so few customers could not possibly cover the cost of running the restaurant, In making the decision of whether to open for lunch, a restaurant owner must keep in mind the distinction between fixed and variable costs. Many of

a restaurant’s costs—the rent, kitchen equipment, tables, plates, silverware, and so on-are fixed. Shutting down during lunch would not reduce these costs. In other words, these costs are sunk in the short run. When the owner is deciding whether to serve lunch, only the variable costs—the price of the additional food and the wages of the extra staff-are relevant. The owner shuts down the restau- rant at lunchtime only if the revenue from the few lunchtime customers would fail to cover the restaurant’s variable costs. An operator of a miniature-golf course in a summer resort community faces a similar decision. Because revenue varies substantially from season to season, the firm must decide when to open and when to close. Once again, the fixed costs—the costs of buying the land and building the course-are irrelevant in making this short-run decision. The miniature-golf course should be open for business only during those times of year when its revenue exceeds its variable costs.