Question

Rapel Valley in Chile is renowned for its ability to produce high-quality wine at a fraction of the cost of many other vineyards around the world. Rapel Valley produces over 20 million bottles of wine annually, of which 5 million are exported to the United States. Each bottle entering the United States is subjected to a $0.50 per bottle excise tax, which generates about $2.5 million in tax revenues. Strong La Niña weather patterns have caused unusually cold temperatures, devastating many of the wine producers in that region of Chile.

1. How will La Niña affect the supply and price of Chilean wine?

a. It will cause supply to increase and price to increase.

b. It will cause supply to increase and price to decrease.

c. It will cause supply to decrease and price to decrease.

d. It will cause supply to decrease and price to increase.

2. Assuming La Niña does not impact the California wine-producing region, how will La Niña impact the market for Californian wines?

a. Equilibrium quantity will decrease and equilibrium price will increase.

b. Equilibrium quantity and price will decrease.

c. Equilibrium quantity will increase and equilibrium price will decrease.

d. Equilibrium price and quantity will increase.

Answer 1

1. Since La Nina weather devastated many of wine producers in that region of Chile, it will lead to decrease in the amount of production and hence supply of wine will decrease. Decrease in supply, with same demand will lead to increase in the price of the wine.Hence, option d is correct option.

2. Even though La Nina did not impact California wine-producing region, the supply of wine in California would be impacted as comparable amount of wine, i.e., 5 million bottles of wine, gets imported to California by the Chile.Since production decreased in Chile due to La Nina weather, it will also lead to the decrease in supply of wine in California. Hence, equilibrium supply of wine in California will decrease. Reduction in supply, will lead to increase in price.Therefore, option a is correct option.