Question: Historical data suggest that wine consumption per capita in the State of New York is:

Wine = - 0.7*Price of Wine + 3.8*Income + 1.0*Price of Beer

where Wine is gallon of wine per capita, Price of Wine and Price of Beer are prices of wine and beer, respectively, and Income is nominal

income per capita. All variables are expressed as percentage changes year-over-year.

a. Explain the demand behavior of wine drinkers in New York.

b. Do these consumers follow the law of demand? Why or why not?

c. The New York government was considering allowing supermarkets to sell wines. Lobbyists argue that the proposed law would help the local

governments to balance their budgets. The argument is that the wine prices will fall, people will buy more wines and consequently local

governments have more tax revenues. Giving the above estimated demand function, do you support their argument? In addition, the local

governments knew that wines and beers are somewhat substituted.