Assume that the wine industry is perfectly competitive and that wine is a normal good. Each wine producer incurs fixed cost of $250/month. Currently there are 500 firms in the industry. Suppose that consumers average annual income is $55,000 per family. Trace these graphs onto your answer sheet. Or, if you are writing up your homework electronically, you can copy and an paste into a Powerpoint or some other software that will allow you to draw additional lines. Suppose that the wine industry is in long-run equilibrium

(a) Draw the marginal revenue curve (label it MR) of the individual wine producer in Graph 1.

(b) Draw the market long-run supply curve label it SLR in Graph 2.

(c) Show the equilibrium price (label it P0), the firms output (q0), and market output (Q0) in the diagrams above. Now suppose that economic studies predict the consumers income will increase to $65,000 per year per family.

(d) What would you expect this change in income to do to the wine industry when the number of firms is fixed? Explain. Show the new equilibrium price (label it P1), the firms output (q1), the market output (Q1), and wine producer profits in the diagrams above. Indicate if the profits are positive, negative, or equal to zero. (Hint: To answer this question, you need to draw a short run supply curve in Graph 2. You can label this supply curve SSR.)

(e) What would you expect the change in income to do to the profits of firms in the long run if firms can enter and exit? What happens to the number of wine producers; does it remain at 500? Show the (new) long-run equilibrium price (label it P2), the firms output (q2), and market output (Q2) in the diagrams below

Graph 1: Individual wine producer MC AC Quantity Price Graph 2: Market for wine D Quantity