Question

Suppose there is an competitive market for red wine in which there are many buyers and producers. Grapes are an input in the production of wine.
Suppose bad weather destorys a third of the shiraz grape (red wine grape) crop and assume it takes one year to make wine. Holding all other things equal, what happnes to the wine market the next year?

a. equilibrium price increases and equilibrium quantity increases
b. equilibrium price decreases and equilibrium quantity increases
a. equilibrium price decreases and equilibrium quantity decreases
d. equilibrium price increases and equilibrium quantity decreases

Answer 1

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Answer: d. equilibrium price increases and equilibrium quantity decreases

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Suppose bad weather destorys a third of the shiraz grape (red wine grape) crop and assume it takes one year to make wine. As a consequence in the next year the supply of red wine will decrease, which means that the supply curve shifts to the left and this will cause the equilibrium price to rise and equilibrium quantity to fall.

Because the demand does not change but a reduced supply will lead to the buyers bidding a high price to acquire the wine in limited supply. So price rises, and dur to less supply quantity falls.