2.1 Saxum Vineyard, in Paso Robles, CA, is one of the more than 8,000 wineries in the...
Question:
2.1 Saxum Vineyard, in Paso Robles, CA, is one of the more than 8,000 wineries in the United States.
While Saxum produces a number of different kinds of wine, it focuses its production on Syrah
(also known as Shiraz). Saxum sells its wines all over the United States. Suppose the market demand function for Syrah is as follows.
Qd = 200 - 38.18P + 8.35PS - 2PC +
10INC + 0.8TS + 0.5M21 where Qd is the monthly demand for bottles of Syrah (in millions), P is the price of Syrah, PS is the average price of substitute bottles of wine
(other varieties), PC is the average price of a pound of cheese and is used to gauge the price of complementary goods, INC is average U.S.
income (in thousands of dollars), TS is the number of wine trade shows and competitions each year that firms can attend to market their wines, and M21 is the number (in millions) of millennials over the age of 21. This last variable captures a change in consumer preferences; millennials are drinking wine at a much higher rate than previous generations.
The market for Syrah also has supply, produced by Saxum Vineyard and other wineries, which can be stated as follows:
Qs = -100 + 22.93P - 5PPI - 10PS +
8TEMP + 1SUP where Qs is the monthly supply of bottles of Syrah (in millions), P is the price of Syrah, PPI is the Producer Price Index (an index used to gauge changes in the costs of production in the United States), PS is the price of substitute wines that could easily be produced instead of Syrah, TEMP is the expected temperature during the harvest season for grapes, and SUP is the number of wineries that supply Syrah in the market (in thousands).
Using the market supply and demand functions for Syrah, fill in the template provided with the coefficient for each function. Using the information below, fill in the value for each of the variables except Price of Syrah. Then set up your Qd and Qs to automatically calculate as you adjust the values for each variable.
Demand:
• Price of substitutes: $18 • Price of cheese: $15 • Income: $53,000 • Trade shows: $3 • Millennials = 43 million Supply:
• PPI: 111 • Price of substitutes: $18 • Temperature: 60 • Number of suppliers: 8,000 Now that you have set up your demand and supply functions, answer the following questions:
1. When the price of Syrah increases by $1, what is the effect on quantity demanded and quantity supplied?
2. How much does a $1 decrease in the price of substitute bottles of wine shift the demand and supply curves?
3. Suppose that the price of Syrah is currently $22 per bottle. How many bottles will be demanded and supplied monthly? Is there a shortage or surplus and of how much?
4. If the market price of Syrah falls to $16 per bottle, how many bottles will be demanded and supplied monthly? Is there a shortage or surplus and of how much?
5. Trying prices in $1 increments between $16 and $22, at what price and quantity does the market equilibrium occur?
6. Suppose that the PPI increases to 123.222.
If the price of wine stays at $20 per bottle, what quantity will be supplied in the market, and will the increase in the PPI create a shortage?
7. With the increase in PPI to 123.222, at what price will the market be in equilibrium? What quantity will be demanded and supplied at this price?
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