question archive In the late 1990s a study sponsored by the California Agriculture Board found that moderate daily consumption of red wine reduced the incidence of heart disease in laboratory rats
In the late 1990s a study sponsored by the California Agriculture Board found that moderate daily consumption of red wine reduced the incidence of heart disease in laboratory rats
Subject:EconomicsPrice:3.87 Bought7
In the late 1990s a study sponsored by the California Agriculture Board found that moderate daily consumption of red wine reduced the incidence of heart disease in laboratory rats. As a result of national press coverage of the report, the demand for red wine increased dramatically. Assume that the wine market satisfies all of the attributes of a competitive market. Further assume that red grapes are the most expensive input into the red wine production process.
- a) Use a graph of the market for wine to demonstrate the effect of the report on market equilibrium.
- b) Graph the reaction of individual incumbent firms to the increase in market demand. In your graph, identify the firm's revenue and cost structures.
- c) What would you predict would happen to long-run industry supply if the price of red grapes increased as wine producers increased their production of red wine. Use a graph to demonstrate the validity of your prediction.
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Answer:
a. The demand for wine rise due to the report
As a result of which the demand for wine will increase at every price level. This will be indicated by a rightward shift in the demand curve.
The shift in demand curve will cause the equilibrium price and quantity demanded to rise.
b. As the price in the market rises due rise in demand , the quantity supplied by an individual firm will rise too.
The equilibrium for competitive market firms is determined at P=MC in the shirt run.
As P rise from P0 to P1 quantity supplied rises from q0 to q1.
c. The rise price of grapes when the procedures have increased the supply of wine will cause the average total cost to rise.
As the cost rises the supply curve will shift towards the left in the short run causing a decrease in equilibrium price.
The new price in the market is P2.
At price P2 long run equilibrium is achieved when P2=ATC1=MC
Before the report the published the long run equilibrium was at P0=ATC0=MC
Mapping these two points on the market and joining them will give us our long run industry supply curve (LRIS).
PFA
