Rapel Valley is reowned for its ability to produce high qualit wine at a fractio

Question

Rapel Valley is reowned for its ability to produce high qualit wine at a fraction of the cost of many other vineyards around the world. Rapel 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 taxes revenues. Strong La Nina weather patterns have caused unusually cold temperatures,devasting many of the wine producers in the region of chile. How will La Nina affect the price of Chilean wine ? La nina doesn't impact the California wine producing region, how will La nina impact the market for Californian wines ?

Explanation / Answer

Due to La Nina which causes unusual cold weather, damages the input of wine that is grapes. As a result, the production decreases which causes a decrease in the supply of Chiliean wine. But with no change in the demand will be constant, the the decrease in supply will lead to a higher price of Chilean wine.

As per there is no impact of La Nina in California.

But as Chilean Wine and California wine are substitute goods, so an increase in price of Chilean wine will lead to an increase in the quantity demanded for the California wine. And as demand increases with no change in supply in california, there will be an increase in price of California Wine as well.

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