Question

A certain wine costs $3 a bottle to produce. It improves in taste if stored properly for a period of time. When it is newly bottled, people are willing to pay only $2 a bottle to drink it. But the amount that people are willing to pay to drink a bottle of this wine will rise by $3 a year for the next 50 years. Storage costs, not including interest, are $.50 per year. If the interest rate is 5% and the wine is kept by rational investors, how old will it be when it is drunk and what will be its price at that time?

          A certain wine costs $3 a bottle to produce. It improves in taste if stored properly for a period of time. When it is newly bottled, people are willing to pay only $2 a bottle to drink it. But the amount that people are willing to pay to drink a bottle of this wine will rise by $3 a year for the next 50 years. Storage costs, not including interest, are $.50 per year. If the interest rate is 5% and the wine is kept by rational investors, how old will it be when it is drunk and what will be its price at that time?

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Added by Kenneth J.

Principles of Economics

Gregory Mankiw 8th Edition

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Solved by Expert Nick Johnson

11/19/2022

Step 1

We need to find out at what age the wine will be consumed and its price at that time, given the initial production cost, the appreciation in value over time, the storage costs, and the interest rate. The wine appreciates by $3 a year, costs $0.50 a year to store, Show more…

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A certain wine costs $3 a bottle to produce. It improves in taste if stored properly for a period of time. When it is newly bottled, people are willing to pay only $2 a bottle to drink it. But the amount that people are willing to pay to drink a bottle of this wine will rise by $3 a year for the next 50 years. Storage costs, not including interest, are $.50 per year. If the interest rate is 5% and the wine is kept by rational investors, how old will it be when it is drunk and what will be its price at that time?

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