It's the Pulp Fiction $5 shake; if your food is good enough people will certainly pay more for it, even if the price seems absurd at first.
Note: I'm speaking from an American perspective, where it would be seen as odd to leave money on the table. In other cultures I'm sure the pride of having good food and happy customers outweighs profit.
There's also the desire to not price out the loyal customers that got you to where you are.
Theoretically, the owner could probably get away with charging quite a lot more. If he were a cynical man/short-termist he could double/triple his prices (possibly even 10x his prices) and still be turning away business in the next couple of weeks while the hype train is running. The spectrum of prices for food in Singapore is pretty wide, you can easily have a meal for anywhere from 4SGD to 200+SGD so there would still be people up for trying Michelin-quality chicken rice if he suddenly started charging 20SGD for a meal.
That will definitely rub the community up the wrong way, given that hawker food is very much deeply entwined with the local community and relies heavily on regulars. The owners are often from the community too so such behaviour would incite feelings of "casting aside your roots".
Would seriously love to give this a try though, when I think of michelin food I tend to think of Heston-style experimental cuisine, which pushes the boundaries of food and employs novel cooking techniques. This type of food is labour intensive though and doesn't really work when one guy in a stall is serving 180 chickens a day. Hawker food done right is like the pinnacle of home-cooking so would be good to taste first-hand how good this is!
Similarly, by charging less and having a line out the door you get to enforce standardization and other nice things on your customer base.
The higher the price I charged, the nicer, cleaner, more-accomodating, courteous, and non-demanding the clientele.
The lowest-price guests were rude, uneducated (scratching non-stick pans with forks, for example), noisy, ungracious, and otherwise a huge pain.
Yet she charges under $40/hour even though I remind her that she could easily get north of $60/hour based on what I've seen people will pay. Her response: "I want to make it accessible to people." Great motivation, but poor profit.
I should add, though, that part of it is what another poster mentioned below: beyond a certain price point you tend to get a class of customer that's simply annoying to deal with.
I actually didn't came out that impressed - sure, the BBQ Pork Buns definitely lived up to their reputation and are worth the trip alone, but the rest of the menu was kind of a disappointment.
I did spend the previous week in Bangkok though, eating almost everything in sight, so my heightened expectations might have had something to do with my impressions.
The only two dishes from Tim Ho Wan that I _really_ remember are BBQ Pork Buns and the steamed egg cake.
Looking at the photos now — I remember thinking toasts filled with kaya were interesting too. But none of shrimp or pork dumplings, neither any of the vermicelli or steamed rice were notable.
From what I've noticed, Asians seem to be more prepared to queue for a good meal.
Examples above aside, those in London need only to go to Kanadaya by Central St Giles to see queues galore.
Jury's out on whether this is a down to a great desire to experience good food or people being kiasu (fear of missing out)
This is kind of late to say this.
I shudder, however, when I think of the queues to try this tasty goodness. For reference, queues can easily top 90 mins if a hawker stall is locally well reviewed! And just over the sea, the queues for Tim Ho Wan (Michelin star dim sum in Hong Kong) are also already oppressively long (1-2 queues). Bookings are non-existent (it's a street stall after all).