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

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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.

1. a) Use a graph of the market for wine to demonstrate the effect of the report on market equilibrium.
2. 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.
3. 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.