Suppose there is a competitive market for red wine in which

Suppose there is a competitive market for red wine in which there are many buyers and producers. An influential study is released providing evidence that drinking red wine lowers the risk of heart disease. At the same time, an earthquake in northern California destroys a quarter of all wine inventories. Holding all else constant, what happens to the equilibrium quantity of wine? Select one: O a. it increases O b. it decreases O c. it does not change d. all of the above answers are possible Nextr

Solution

First, there is perfect competition in red wine market .

The influential study proves that consumption of wine is beneficial . Hence demand for wine rises . People will start to consume more wine . So the demand curve shifts right . Equilibrium price and quantity both rises .

At the same time earthquake destroys wine inventories . Hence supply of wine falls . The supply curve shifts left . The equilibrium price rises and quantity falls .

So the equilibrium price will rise definitely but change in quantity is ambiguous . It will depend upon elasticity of the curves and also other sources of supply available . Answer : d) all the above are possible .