The wine industry is currently composed of many firms, and wine is sold in a perfectly competitive market. The wine industry produces the efficient annual output of wine, which is 100,000 bottles per year. The market equilibrium price is $5 per bottle.
a. Draw the market demand and supply of wine, and label the curves to show why the market out¬put is the efficient output. b. Suppose that the wine industry is consolidated into one large monopoly firm. As a result of the monopolization of the industry, the price of wine increase to $7 per bottle, and the annual quantity demanded falls to 75,000 bottles. Why is this output not efficient? Show the loss in net benefits resulting from monopolization of the industry.
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