Question

Coke consumption per capita (gallon per capita) in Beijing is:

Coke = – 0.7*Coke’s Price + 3.8*Income + 1.0*Pepsi’s Price

Variables are expressed as percentage changes over years.

1. Explain the demand behavior of Coke drinkers in Beijing?
2. Is that true when someone saying that “Coke drinkers in Beijing follow the law of demand”? Why or why not?
3. The Beijing government was going to allow supermarkets to sell Coke. Lobbyists argue that the proposed law would help the local governments to balance their budgets. The argument is that the Coke prices will fall, people will buy more Coke and consequently local governments have more tax revenues. Giving the above estimated demand function, do you support their argument? In addition, the governments knew that Coke and Pepsi are substituted.

Answer 1