Weekly 4: Evaluating a Price Floor on Alcohol

Due Thursday 3/7

Scotland recently introduced a price floor on alcohol in an attempt to reduce drunk driving accidents by reducing drinking. For a typical bottle of wine, the floor would be about $5 in the US. This question examines how that would have affected buyers of “Two-Buck Chuck”, a famously inexpensive wine from the Charles Shaw winery that sold for $2 a bottle. At its peak, Trader Joe’s, a trendy US grocery store, sold about 80 million bottles of it a year.

Suppose a $5 price floor had been imposed during the heyday of Two-Buck Chuck (TBC). As noted above, without the floor TBC was selling for $2 per bottle and 80 million bottles a year were being sold. Also, suppose the elasticity of demand for TBC was believed to be -0.4 and the elasticity of supply was believed to be 1.2, but that the government wanted a sensitivity analysis that considered lower and higher elasticities as well.

Please use the spreadsheet in Teams to analyze the impact of the price floor. In addition to carrying out the calculations and answering the questions at the bottom, please create the following three bar charts, each of which should have one bar per case:

1. Impact on Quantity (should show %`Delta Q`)
2. Change in Producer Surplus (should use Millions as the unit)
3. Impact on SS (should show `Delta SS`). 

For each graph, use data labels and also adjust the X axis labels to keep them from overlapping with the bars by setting their location to "high".

Finally, for extra credit: what tax rate on TBC, in dollars per bottle, would produce the same change in the quantity, and how much revenue would it produce for the government?