Consider a wine maker who has put her wine in bottles.The question is whether to store the wine for a marginal cost of $1 per year or to sell the wine today at a price of $10.If the interest rate is 6%,how much must the price of the wine increase in the next year to justify storing it?

Question

Quizplus · Accepted Answer

To justify storing the wine, the future price must cover the marginal cost of storage and the opportunity cost of not selling the wine today. The opportunity cost is calculated using the interest rate. If the wine is sold today, it would yield $10. If stored, it costs $1, and the foregone $10 could have earned 6% interest, totaling $0.60 ($10 * 6%). Therefore, the wine's price must increase by at least $1.60 ($1 + $0.60) to justify storage. Rounding to the nearest option gives $1.66.

Consider a Wine Maker Who Has Put Her Wine in Bottles.The