Question

According to the Winemakers Association of North America, wildfires contributed to the lowest level of wine production in 60 years. This record low production has driven up prices sharply in the US wine market. Meanwhile, the price of microbrew beer increased significantly for the first time in many years. (Assume a cross price elasticity of microbrew beer with respect to wine is Eab= 1.5.)  
3.1 Illustrate this observation with one demand and supply graph for the market for California wine and another demand and supply graph for microbrew beer.
3.2 Make sure that your graphs clearly show (1) the initial equilibrium before the decrease in the supply of California wine and (2) the final equilibrium.
3.3 Use arrows to indicate any shifts in the demand and supply curves for each market.
3.4 Label your graphs fully and write an explanation of your work.

Answer 1

1.5 = %change in quantity demanded of beer / % change in price of wine

1.5 * % change in price of wine = %change in quantity demanded of beer

A positive cross price elasticity among wine and beer suggest that these two goods are substitutes to each other.

Wildfires have contributes to the lowest production level of wine which have shifted supply curve of wine to its left from AS to AS1 while demand remains same which have raised the price of wine from P to P1.

Increase in price of beer will induce consumers to reduce their quantity demanded which cause upward movement along the demand curve of beer.

Note: Change in price of a good cause movement along the demand curve while all other factors shift demand or supply curve upward or downward.