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Chapter 13: Problem 4

There are about 400 wineries in California's Napa Valley. Describe the reaction of consumers if the owner of one of the wineries- Chip Case's Wine Emporium-raises the price of his wine by \(\$ 5.00\) per bottle, assuming the following: a. The industry is perfectly competitive. b. The industry is monopolistically competitive.

Short Answer

Expert verified
In a perfectly competitive market, consumers are likely to switch to other wineries if Chip Case's Wine Emporium increases its wine prices by $5 per bottle. In a monopolistically competitive market, the reaction would depend on how much consumers value the unique aspects of the Wine Emporium's wine compared to other wines. If the premium placed on these unique aspects is high, then consumers might continue to purchase despite the price increase. If not, they might switch to cheaper alternatives.

Step by step solution

01

Understand the Characteristics of Perfect Competition

Under perfect competition, there are numerous firms selling an undifferentiated product. The market price is determined by the industry's supply and demand, and individual firms are price takers. In this context, if the price of wine in the Wine Emporium increases by $5, this will be higher than the market price.
02

Predict Consumer Reaction under Perfect Competition

Consumers are sensitive to price changes in a perfectly competitive market because they have many alternatives. If Chip Case's Wine Emporium raises its prices, consumers will likely switch to other wineries. Since there are about 400 wineries in Napa Valley, consumers have numerous alternatives to choose from.
03

Understand the Characteristics of Monopolistic Competition

A monopolistically competitive market also has numerous firms, but each firm differentiates its product. Despite the presence of competition, these differences enable the firm to have some control over its price.
04

Predict Consumer Reaction under Monopolistic Competition

In a monopolistically competitive market, an increase in the price of wine from the Wine Emporium may or may not cause a significant shift of consumers to other wineries. If consumers perceive the Wine Emporium's wine as distinctly superior or unique due to taste, brand, or other factors, they might accept the higher price. However, if the difference in the quality or characteristics of the wine isn't significant enough, the price increase could lead consumers to seek alternatives.

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