ECON Wines produces two varieties of white wine, Semillon and Semillon Chardonnay.

(a) Use the data in the following table to draw a production possibilities frontier (PPF) for ECON Wines.

ECON Wines production choices per year (cases of wine)
Choice	Semillon	Semillon Chardonnay
A	1750	0
B	1300	380
C	870	700
D	420	920
E	0	1250

(b) ECON Wines is currently producing 900 cases of Semillon and 680 cases of Semillon Chardonnay. Show this production combination on the PPF diagram for ECON Wines. Is this an efficient point? Explain. 

(c) Illustrate and explain the effect that drought would have on the PPF.

(d) Construct a supply and demand diagram representing the entire market for Semillon wine. Your diagram will not contain data or numbers, but will show how supply and demand interact to generate prices and quantities. Call this initial equilibrium price P0 and the initial equilibrium quantity Q0. Present and explain (including all assumptions) the following changes on your diagram (that is, just one diagram showing all of i, ii and iii below) with the single end result of a new equilibrium price P3 that is lower than P0.

1. Wide spread drought that reduces industry grape yields. 

2. An economy wide increase in income tax rates.

3. A decrease in the price of beer.

Question 2 – ALL CALCULATIONS MUST BE SHOWN

A local theatre company is losing money. The current price of admission is $30 per person with an average daily attendance of 460 people. You are an independent consultant employed to recommend a pricing strategy. The demand schedule estimated by the consultant is shown in the table below.

Price	Quantity of tickets sold per day	Elasticity
0	736	--
10	644
20	552
30	460
40	368
50	276
60	184
70	92
80	0	Infinity

a. Fill in the blanks in the table above. There are 7 empty cells [marked as 0.5 marks per cell correctly filled]. Use the point method (deltaQ/deltaP)*(P/Q) to calculate the own-price elasticity of demand. 

b. As a consultant what would be your recommendation regarding pricing strategy? Should the theatre company change the price from $30? Justify your answer based on the price elasticity of demand. 

c. From the information in the table write the equation for the daily demand for theatre tickets in price dependent form (P=a-bQ). 

d. Use the midpoint method to calculate the price elasticity of demand from $65 to $70. Explain whether demand is price elastic or price inelastic and interpret the value of this elasticity. 

e. A cinema located in the same neighbourhood as the theatre company charges an entry fee of $20. Current daily patronage is 350 customers. Cinema management estimates that a $5 price rise in theatre admission tickets from the current price of $30 would result in a 15% increase in cinema tickets purchased. Provide the name of, and calculate the value of, this elasticity. Interpret its value. What does this elasticity value tell the cinema managers about the relationship between theatre ticket prices and cinema tickets? How many customers would purchase cinema tickets if the price of theatre tickets increased by $5?