3.4 Will Mexico stop producing tequila? Because of record-low industry prices for the agave azul plant, from which tequila is distilled, farmers in Jalisco and other Mexican states are switching to more lucrative plants like corn (Kyle Arnold, “No Mas Tequila,” The Monitor, September 17, 2007).

Planting of agave rose substantially from 2000 through 2004, and then started to plummet as the price of inexpensive tequila fell. The number of agave planted went from 60 million in 2000, to 93 million in 2002, to 12.8 million in 2006, and the downward trend continued in 2007. It takes seven years for an agave plant to be ready for harvesting.

The price of inexpensive tequila has dropped 35%

to 40% in recent years, but the price of high-end tequilas, which have been growing in popularity,

has remained stable. Discuss the relative sizes of the short-run and long-run supply elasticities of tequila. What do you think the supply elasticity of high-quality tequila is? Why? If the demand curve for inexpensive tequila has remained relatively unchanged, is the demand curve relatively elastic or inelastic at the equilibrium? Why?