The Cost of Producing Wine at Only a Small Fraction of the Price

Most consumer goods are not sold by the manufacturer. Instead, they are produced by the manufacturer, who sells to a wholesaler, who in turn sells to a retailer, who sells to the public. Such is the case with most wine.

There has been an outcry in recent years over increases wine in prices. Although prices have risen sharply, the multilevel market structure and the markup that occurs at the wholesale and retail levels have a much larger role in the price increases than the production of the wine itself. Total production costs for a typical $24 bottle of wine are just $4.92, or about 20.4% of the final price, whereas wholesale and retail markups together make up 40% of the final price. Not surprisingly, raw materials (grapes) are the single biggest cost. The cost of the grapes may be as much as 60% of total production costs but varies greatly from lower-quality inexpensive wines to the highest quality wines. The second-highest cost for many vintners is the barrels used to ferment the wine. French oak barrels cost as much as $700 apiece and last only a few years. The other major production cost, other than the actual physical plant where the winemaking occurs, is time. Quality wines spend 2–2 ½ years aging in barrels and then an additional 8 months in bottles before being ready for sale.

1. How much substitutability do you suppose exists between inputs in winemaking? How might this factor affect efforts to cut costs?
2. If a firm were to find a new technology that cut the required aging time in half, how would it affect the demand for other inputs?

The Cost of Producing Wine at Only a Small Fraction of the Price

Most consumer goods are not sold by the manufacturer. Instead, they are produced by the manufacturer, who sells to a wholesaler, who in turn sells to a retailer, who sells to the public. Such is the case with most wine.

There has been an outcry in recent years over increases wine in prices. Although prices have risen sharply, the multilevel market structure and the markup that occurs at the wholesale and retail levels have a much larger role in the price increases than the production of the wine itself. Total production costs for a typical $24 bottle of wine are just $4.92, or about 20.4% of the final price, whereas wholesale and retail markups together make up 40% of the final price. Not surprisingly, raw materials (grapes) are the single biggest cost. The cost of the grapes may be as much as 60% of total production costs but varies greatly from lower-quality inexpensive wines to the highest quality wines. The second-highest cost for many vintners is the barrels used to ferment the wine. French oak barrels cost as much as $700 apiece and last only a few years. The other major production cost, other than the actual physical plant where the winemaking occurs, is time. Quality wines spend 2–2 ½ years aging in barrels and then an additional 8 months in bottles before being ready for sale.

1. How much substitutability do you suppose exists between inputs in winemaking? How might this factor affect efforts to cut costs?
2. If a firm were to find a new technology that cut the required aging time in half, how would it affect the demand for other inputs?

3. For each of the following goods, briefly describe the allocation mechanism that is most commonly used in the United States:

            a. Pepsi cola

            b. gasoline

            c. medical care

            d. marijuana

            e. guaranteed student loans

            f. body organs

            g. babies

The forces of supply and demand determine the prices which prevail for most goods and services. Take a look again at any Supply/Demand chart. What or who is represented by the segment on the demand curve which is located below the equilibrium price? In truth, this segment represents those would like to buy the particular good if the price was lower, but can’t (or choose not to) buy the good at its currently higher price. Perhaps this is trivial for goods like lattes or services like travel to the Bahamas (it’s not a tragedy that some cannot afford a latte or a trip to Bahamas, right?), but think about other goods, such as antibiotics, or services such as education. If the market sets the price, then there will always be some who can’t quite pay the price required. Does this feature of the market system strike you as immoral? Because “the market” (forces of supply and demand) does not guarantee that everyone who needs antibiotics will get them, should the market be abandoned in favor of some other system of pricing and distributing goods and services? Why or why not?

Can be any goods or service.

Consider an everyday good or service. What are the most important, managerially significant, costs of supplying that good or service to you? Estimate and explain the costs from the best available information. Be sure to: i) Define the short-run period that you believe is managerially significant, and why; ii Identify which costs are variable and which are fixed, and provide estimates of the more managerially significant costs; ii) Draw and describe the likely nature of the short-run cost curve with respect to managerially significant quantities; iv Discuss implications for the business based on your analysis. This answer should not exceed 750 words and will be assessed holistically;

Most individual consumers in the consumer market buy goods and services for the purpose of personal consumption or to give as gifts to others for personal consumption too. However, in the business to business or industrial market, organizations buy some fundamental things from other organizations for various direct business operational purposes relevant for their main business offerings. (a) List out only 4 direct business operational purposes for which organizations buy what they buy from other companies in the B2B market . (b) Then, using 4 different real company-examples in different B2B buying situations, explain the 4 fundamental purposes by describing what each organization does with what it buys for the operation of business

sub ject : Marketing

If nothing else changes, an increase in interest rates will __________.

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A raise investment spending because it raises the expected returns

B lower investment spending because it raises the opportunity cost of funds

C lower consumption spending because it reallocates funds toward investment

D have no effect on aggregate expenditures

Even though I lost my job, causing my income to drop significantly, I still continued to pay my rent. This spending is an example of _____________.

A autonomous consumer spending

B investment spending

C induced consumer spending

D spending based on expectations

What is the primary determinant of government spending?

A Interest rates

b Current income

c Inflation levels

d Politics

Bottom of Form

If inventories are rising, we can assume that which of the following is true?

.A Consumption and investment is greater than production, suggesting output will rise

b Production is greater than consumption and investment, suggesting output will fall

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Which of the following would likely cause a decrease in consumption in the economy?

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aAn increase in expected income

bA fall in income tax rates

cA rise in expected income

dAn increase in interest rates

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Which item is included in the calculation of U.S. GDP?

A New housing construction

B Transfer payments

C Intermediate goods

D Purchases of used cars by consumers

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If aggregate expenditure is greater than real GDP, we could expect which of the following to occur?

A Inventories to decline and real GDP to increase in the future

B Inventories to increase and real GDP to increase in the future

An increase in real GDP will be most likely to cause further increases in __________.

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A consumption only

B consumption and investment only

C consumption, investment, and net exports only

d consumption and investment, but a decrease in net exports

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If taxes are increased by $50 billion, the effect on the economy will be ___________.

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A an increase in inflation

B a decrease in total spending in the economy of $50 billion

C an increase in the international trade deficit

D an ultimate decrease in consumption spending of more than $50 billion

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An increase in net exports will cause GDP to ______________. Assume that the marginal propensity to consume increases from .9 to .95. An increase in net exports will now have a ______________ effect on GDP.

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A increase; larger

B increase; smaller

C decrease; larger

D decrease; smaller

E increase; one can not tell

An increase in the marginal propensity to consume will make the spending multiplier ______________. An increase in taxes as a portion of income will make the spending multiplier ______________.

A larger; larger

B smaller; smaller

C smaller; larger

D larger; smallerBottom of Form

C Inventories to decline and real GDP to decline in the future

d Inventories to increase and real GDP to decline in the future

To boost the economy, the government may propose a reduction in the income tax, which will _____________.

A increase the marginal propensity to save, which will raise funds available for investment

B increase the marginal propensity to consume, which will raise the consumption

C lower the marginal propensity to save, which will lower funds available for investment

D lower the marginal propensity to consume and thus raise consumption

Which of the following is not considered part of investment in the calculation of GDP?

A Machinery

b Stock ownership in a company

c Factories

d Inventories

What term refers to income after all taxes are paid?

A Disposable income

B Total income

C Net income

D Gross income

8. When some goods are public

A. The market outcome is Pareto optimal B. The market outcome is not Pareto optimal because too much of the public good is supplied. C. The market is not Pareto optimal because too little of the public good is supplied due to the free-rider problem. D. The market outcome is not Pareto optimal because government spending is distortionary.