Bob's winery sells bottles of their expensive, high-quality wine ...

[panfilo]

Bob's winery sells bottles of their expensive, high-quality wine and a cheaper low-quality wine. Visitors have to drive 45 minutes to get to Bob's winery.
 
  Bob also sells his wine at a shop in the city where consumers don't have to drive a long distance and charges the same prices. Assuming the preferences of the clients that come to the winery and the city store are the same, explain why Bob tends to sell the expensive wine in a greater proportion in the winery than the urban store.

Question 2

When diminishing marginal returns set in,
 
  A) average product is increasing.
  B) average variable cost is decreasing.
  C) average cost is decreasing.
  D) None of above.

[stillxalice]

Answer to Question 1

The relative price of expensive wine to cheap wine is smaller when adding on the fixed cost of driving to the winery. Thus, patrons at the winery will buy more expensive winesthis is a difference brought by a substitution effect. It is possible that the income effect from driving has a countering effect, if wine is inferior, but wine is unlikely to have a large income effect because it is a small portion of a person's income.

Answer to Question 2

D