Question #2: This question contains two parts and they are independent to each other. Part 1: Data in 1970-1999 suggest that wine consumption per capita in the State of New York is:Wine = – 0.7*Price of Wine + 3.8*Income + 1.0*Price of Beer where Wine is gallon of wine per capita, Price of Wine and Price of Beer are prices of wine and beer, respectively, and Income is nominal income per capita. All variables are expressed as percentage changes year-over-year. Explain the demand behavior of wine drinkers in New York. In 2003, the New York government was considering allowing supermarkets to sell wines. Lobbyists argue that the proposed law would help the local governments to balance their budgets. The argument is that the wine prices will fall, people will buy more wines and consequently local governments have more tax revenues. Giving the above estimated demand function, do you support their argument? In addition, the local governments knew that wines and beers are somewhat substituted. Part 2: Boeing estimates the own-price elasticity of demand for new commercial jets is –1.25. Use their estimate to answer the following questions. Is the demand of new Boeing commercial jets price elastic or price inelastic? Explain. The objective of Boeing is to maximize its total revenue. Would you recommend them to cut 10 percent price of new commercial jets prices? Why or why not?

Equation: %∆Wine = – 0.7×(%∆Price of Wine) + 3.8×(%∆Income) + 1.0×(%∆Price of Beer)

Answered: Question #2: This question contains two…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question #2: This question contains two parts and they are independent to each other.

Part 1: Data in 1970-1999 suggest that wine consumption per capita in the State of New York is:

Wine = – 0.7*Price of Wine + 3.8*Income + 1.0*Price of Beer where Wine is gallon of wine per capita, Price of Wine and Price of Beer are prices of wine and beer, respectively, and Income is nominal income per capita. All variables are expressed as percentage changes year-over-year.

Explain the demand behavior of wine drinkers in New York.

In 2003, the New York government was considering allowing supermarkets to sell wines. Lobbyists argue that the proposed law would help the local governments to balance their budgets. The argument is that the wine prices will fall, people will buy more wines and consequently local governments have more tax revenues. Giving the above estimated demand function, do you support their argument? In addition, the local governments knew that wines and beers are somewhat substituted.

Part 2: Boeing estimates the own-price elasticity of demand for new commercial jets is –1.25. Use their estimate to answer the following questions.

Is the demand of new Boeing commercial jets price elastic or price inelastic? Explain.

The objective of Boeing is to maximize its total revenue. Would you recommend them to cut 10 percent price of new commercial jets prices? Why or why not?

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