Problem 1:
a) Use cheap Australian wine that costs below $10 a bottle and premium wine that costs more than $100 a bottle to explain what an inferior good is compared to normal good.
b) State another pair of related products as examples of inferior and normal good .
c) Assuming an increase in income, use the Demand Supply model for cheap Australian wine shown below to:
- describe the movement of the demand/supply curves if any,
- indicate what the new equilibrium price and quantity may be.
Problem 2: Assuming better than usual weather and soil conditions perfect for grapes cultivation and wine growers in Australia, use the above demand supply model to predict
- what will happen to the demand and/or supply curve,
- whether a temporary surplus or shortage of wine will result and
- what will be the new equilibrium price and quantity of wine.