a) In the short run (next few months), what measures should the restaurant take to maximize its profits? Explain.
The French restaurant enjoys monopolistic competition. In order to maximize its profitability in the short run, the management of the restaurant should apply an effective and practical economic model. As a restaurant, it prepares different categories of foodstuffs. Hence, the management is supposed to scrutinize both the pricing strategy and the profit-maximizing quantity.
A downward-sloping demand curve is generated if the restaurant opts to sell different types of foodstuffs (differentiation). In order to increase the volume of sales, the restaurant is expected to lower its price (Samuelson & Marks, 2012). All the food categories offered at the restaurant should be charged at a lower price. A total change in revenue when additional food types are introduced into the restaurant is depicted by marginal revenue. The latter will be lower if additional units are sold at a lower price. The management of the restaurant should ensure that the marginal cost is below the marginal revenue when lowering the prices of its meals.
b) In the long run (the next six months and beyond), how can it maximize its profits? (Assume that the impressive state of demand is permanent).
After price reduction, the state of demand will obviously be impressive. Since the restaurant is monopolistically competitive, it is anticipated to earn an average profit margin especially if the initial demand level is sustained. Long-term profit maximization will require the management to mark-up its food prices after considering the cost of preparing and serving meals at the restaurant (Rubin & Dnes, 2010). However, price mark-up should not be exaggerated because other competing restaurants may charge lower prices and eventually win a larger market share.
On the other hand, the restaurant can still maintain low prices for meals but reduce overhead costs such as expenses incurred when purchasing raw food products, salaries and wages as well as utility bills.