Answer to Question #236366 in Microeconomics for Kelvin

Question

Mr Chan lives with his parents in Aberdeen. He owns a flat in causeway bay. The order of preference of ways for him to use his flats as follow

1st choice: run a restaurant. 2nd choice: rent it out. 3rd choice: live in it. Explain how the cost of using the flat to run the restaurant maybe affected if, a. The market rental rate sharply increases. b. His parents health deteriorates and there is an increasing need for him to take care of them. c. He has employed a cook at a salary lower than the market rate

Answer 1

a)If the market rental rate sharply increases, then it would create a big opportunity cost for Mr. Chan. This is because he will miss out on the opportunity to just give the property on rent. In this way his cost which might have been incurred by him for running the restaurant would be saved (also the time and effort he would have to put in the business) and he could enjoy higher rental income. 

b) In the case if Mr. Chan's parents health starts deteriorating and he would require to go back to Aberdeen, then he would not be able to take care of the business. Delegating entire operation to a manager in its starting years will cause increasing chances of its failures. This would thus turn out as loss for Mr. Chan. The best option at such time would be to just rent the property out. 

c) If he had employed a cook at a salary lower than the market rate, then he could have saved cost in terms of the fixed cost. This would increase the profit margins and thus grow the business. It would also act as a competitive advantage.