A review of Kappo Masa, a popular restaurant in New York City, noted, “The markup that New York restaurants customarily add to retail wine and sake prices is about 150 percent. The average markup at Kappo Masa is 200 percent to 300 percent.” Even 150 percent is a much larger markup than the markups restaurants use to price the meals they serve. Why do restaurant use a higher markup for wine than for food, and why might a popular restaurant mark up the price of wine more than an average restaurant does? 1)The difference in the markups is likely due to A) the need to cover state and federal taxes on wine and alcohol products. B) differences in the prices of the products C) differences in the price elasticity of demand between the two products. D) restaurants’ attempt to discourage alcohol consumption 2)A popular restaurant might mark up the price of wine more than an average restaurant does because A)they buy more expensive wine. B) the diners are used to more selections. C) buy more wine . D) the popularity of a restaurant draws diners who are willing to pay more
The Correct Answer and Explanation is :
1) The correct answer is C) differences in the price elasticity of demand between the two products.
Restaurants typically apply a higher markup on wine and other alcoholic beverages because of the differences in price elasticity of demand between food and alcohol. Price elasticity of demand refers to the sensitivity of consumers to price changes. Food is usually considered a basic necessity, and therefore its demand is less elastic (i.e., consumers will still buy food even if prices increase). On the other hand, alcoholic beverages like wine are considered luxuries, and the demand for them tends to be more elastic (i.e., a higher price may cause consumers to cut back or choose not to purchase the product). However, because restaurants know that consumers are often willing to pay a premium for a bottle of wine or sake during a dining experience, they can set a higher markup without significantly reducing sales. This allows them to cover the costs associated with the sale of alcohol, such as licensing fees, taxes, and overhead, while still profiting from the sale.
2) The correct answer is D) the popularity of a restaurant draws diners who are willing to pay more.
A popular restaurant like Kappo Masa can charge a higher markup on wine because its clientele is willing to pay more due to the status or perceived value of dining at such an establishment. When a restaurant becomes a destination, especially in a competitive market like New York City, diners may expect to pay a premium for the experience, which includes not just the food but also the wine list and ambiance. Additionally, diners at high-end or popular restaurants are often more affluent, and thus more likely to spend on expensive wines. The restaurant can capitalize on this willingness to pay by marking up the wine prices significantly without losing customers, as the dining experience itself becomes a major part of the perceived value.