Economics 379Quiz #2 Professor Thornton

Wine Economics100 points Fall 2015

Each question is worth 6 points. You will receive 4 points for writing your name on the answer sheet.

1. Which of the following is a winery thattwo or more wine firms share to produce their wine products?

Bonded winery
Alternating proprietor winery
Custom crush winery
Bonded wine cellar

2. Which of the following is a disadvantage of legally organizing a wine firm as a proprietorship?

a. The owner is personally liable for the wine firm’s obligations and his house, bank account and

other personal assets may be seized if the wine firms cannot pay its debts.

b. The owner is legally required to make all decisions for the wine firm.

c. The profits of the firm are taxed twice, one as firm income and a second time as dividend income.

d. The owner must purchase all of the wine firm’s stock so he cannot diversify his portfolio of assets.

3. Suppose a wine firm plans to buy bulk wine each year for five years. A major disadvantage of

purchasing bulk wine on the spot market is:

a. adverse selection and moral hazard is more likely than it is when buying bulk wine under a five year

contract.

b. enforcement cost is higher than buying bulk wine under a five year contract.

c. search cost is higher than buying bulk wine under a five year contract.

d. All of the above.

4. Moral hazard exists when:

a. one party has information unknown to the other party about the characteristics of a good prior to

an agreement to make a market exchange.

b. one party has better information about implementing the terms of a contract than the other party

after an agreement to make a market exchange.

c. one party has a cost advantage over another party when making a market exchange.

d. two parties make an unethical market exchange.

5. Opportunistic behavior often times arises from:

a. complete contracts.

b. high search costs.

c. unanticipated fixed costs.

d. incomplete contracts.

6. Suppose a proprietor that owns a wine firm wants to maximize her utility as a consumer. She will be

motivated to maximize wine firm profit if:

a. she gets utility from a nonmarket good that can only be obtained by owning the wine firm.

b. all goods that give her utility can be purchased in the marketplace.

c. she produces and sells luxury wine products.

d. she wants to bequeath the wine firm to family members.

7. Wine Spectator gave the vintage 2010 Screaming Eagle Cabernet Sauvignon wine product a quality

score of 96 points and the Vintage 2010 Turnbull Fortuna Cabernet Sauvignon wine product a quality score of 95 points. The price of a bottle of Screaming Eagle is $850 and the price of a bottle of TurnbullFortuna is $75. The quantity produced of Screaming Eagle was 610 cases and Turnbull Fortuna 243 cases. Which of the following is the best explanation for the big difference in the prices of these two wine products?

a. The supply of Screaming Eagle is limited so it can command a higher price than Turnbull Fortuna.

b. Screaming Eagle is a luxury wine and Turnbull Fortuna is a premium wine.

c. The quality of Screaming Eagle is 11.3 times higher than Turnbull Fortuna.

d. Screaming Eagle has a more prestigious brand image than Turnbull Fortuna.

8. When planting a new vineyard, growers must choose the type of vines to plant. This choice involves

choosing all of the following except:

a. vine variety.

b. vine tendril

c. vine clone

d. vine rootstock

9. If the objective of a grape grower is to maximize the yield of lower-quality grapes for commodity

wine, then he should:

a. farm the grapes organically.

b. farm the grapes biodynamically.

c. severely limit the amount of water the vines get from irrigation.

d. provide vines a generous amount of water from irrigation.

10. Many grape growers believe there is a tradeoff between grape quality and yield. However,

viticulturist Richard Smart argues that the relationship between quality and yield is a correlation, not a causal relationship. If Smart ‘s argument is correct then which of the following would have no effect on grape quality?

a. Irrigation

b. Weather

c. Cluster pruning

d. All of the above

11. Which of the following is an important characteristic of the location where grapes are grown that

influences wine quality?

a. Climate

b. Soil

c. Landscape

d. All of the above

12. Most long-term grape contracts specify that the buyer agrees to purchase:

a. a specific quantity of grapes each year.

b. all the grapes produced on a given number of acres of vineyard land each year, up to some

maximum quantity.

c. a different amount of grapes each year according to a quantity formula.

d. the amount of grapes required to produce a specific quantity of wine each year.

13. Many long-term grape contracts have a variable price provision that allows the price per ton of grapes

to change each year according to a formula. For which of the following variable price formulas would the grower and wine firm share the risk of uncertain wine market conditions?

a. Price per ton is equal to last year’s spot market price of grapes.

b. Price per ton is equal to last year’s spot market price of grapes plus the percentage change in the

consumer price index.

c. Price per ton is equal to last year’s spot market price of grapes multiplied by 100.

d. Price per ton is equal to the retail price of the wine that the grapes were used to produce multiplied

by 100.

14. Suppose that a grower and wine firm have a long-term contract that specifies the price per ton of

grapes and allows the wine firm to decide when the grapes are harvested. The wine firm has an economic incentive to choose to harvest the grapes:

a. as soon as they achieve minimal ripeness when they have a high water content.

b. as soon as they achieve minimal ripeness when they have the highest acidity.

c. as late as possible when they achieve maximum ripeness and have a low water content.

d. as late as possible when they achieve maximum ripeness and have the highest acidity.

15. Suppose that this year good weather results in an unexpectedly large grape crop, and therefore a

surplus of grapes on the long-term contract market. How is this surplus eliminated so that the grape market clears?

a. The price of grapes falls, which increases the quantity demanded of grapes.

b. The price of grapes falls, which decreases the quantity supplied of grapes.

c. Wine firms with long-term grape contracts purchase the surplus grapes, produce more wine than

planned, and store the excess wine to sell in future years or sell this excess on the bulk market.

d. Both a and b.

16. When the actual production of winegrapes is below its long-term trend, the grape market is said to be

in the boom phase of the wine grape cycle. Which of the following best describes the boom phase?

a. Underproduction, relatively high prices, and above normal profits for growers.

b. Overproduction, relatively high prices, and above normal profits for growers.

c. Underproduction relatively low prices, and below normal profits for growers.

d. Overproduction, relatively low prices, and above normal profits for growers.