1.12 In the world of French high cuisine, a threestar rating from the Michelin Red Guide is a widely accepted indicator of gastronomic excellence.

French consumers consider Gault Milleau, another restaurant guide, not as authoritative as the Michelin guide because Gault Milleau, unlike Michelin, accepts advertising and its critics accept free meals (William Echikson, “Wish Upon a Star,”

Wall Street Journal, February 28, 2003, A8).

a. Why are guides’ ratings important to restaurant owners and chefs? Discuss the effect of a restaurant’s rating on the demand for the restaurant.

b. Why do advertising and free meals taint the credibility of Gault Milleau? Discuss the moral hazard problem of Gault Milleau’s ratings.

c. If advertising and free meals taint the credibility of Gault Milleau, why does the guide accept advertising and free meals?