Reference no: EM13149850

Among the victims of the 2007–2009 recession were luxury restaurants in New York, Chicago, and other large cities. Rubicon, a top-rated San Francisco restaurant, closed in August 2008. The Blue Water Grill in Chicago also closed. Other restaurants attempted to survive by offering discounts. High-end New York restaurant Jean Georges slashed prices for three- and four-course meals. Other restaurants followed suit, some offering three-course meals for less than $20; the London Grill in Philadelphia offered a lobster or beef meal for $18.95. To avoid high labor costs, San Francisco’s Fifth Floor started an “Honor Bar” where customers place money in a box on the honor system and pour their own wine. An article summarizing the woes of the restaurant industry commented: Currently, consumers appear to be “trading down,” choosing lower-priced restaurants than they used to. The National Restaurant Association projects sales, adjusted for inflation, will decline by 2.5% in full service restaurants in 2009, while it predicts quick service will grow by 0.4%. Stephen Hanson, who closed several of his once-successful restaurants in New York and Chicago, has had better luck with restaurants that offer less expensive meals. Mr. Hanson explained the success of his big restaurants that earn a small profit from a large number of customers: “I’m in the volume business.” By 2010, business at upscale and other restaurants began to recover as the recession ended. 1. What are the key determinants of the price elasticity of demand for meals served at high-end restaurants? 2. Cite evidence that high restaurant prices resulted in low quantity demanded and a substitution by consumers to lower-priced alternatives.