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2. Suppose you are the manager of a California winery. If researchers discover a new wine-making...

2. Suppose you are the manager of a California winery. If researchers discover a new wine-making technology that reduces production costs, how would you expect this event affects the price of you receive for a bottle of wine? A. increase the equilibrium price and decrease the equilibrium quantity B. decrease the equilibrium price and increase the equilibrium quantity C. decrease the equilibrium price and quantity D. increase the equilibrium price and quantity

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Answer #1

If the new wine making technology reduces the costs of producing wine, the supply of wine increases across firms since more wine can be produced from the same amount of input. This causes a reduction in the price of wine. In a demand supply framework, the upward sloping supply curve shifts towards the right (from S to S' in the figure), thereby increasing the equilibrium quantity supplied and decreasing  the equilibrium price. The correct option is B.

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