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Suppose Krazy Kokonut is the sole producer of coconut wine on the island of Somewhere. The...

Suppose Krazy Kokonut is the sole producer of coconut wine on the island of Somewhere. The inverse demand function for KK wine is:

P = 1000 - 1Q - .2 I,

where P is price per bottle, Q is bottles of wine, and I is per capita income in Somewhere . Marginal costs of producing wine are positively related to Q. That is, the higher is Q, the greater is MC.

If per capita income in Somewhere goes up, what happens to the profit-maximizing level of production of KK’s wine and the price of wine? Explain carefully.

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