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Question

Historical data 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.


A) 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.

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