Question

10. You are the manager of a firm that produces and markets a generic type of soft drink in a competitive market. In addition to the large number of generic products in your market, you also compete against major brands such as Coca-Cola and Pepsi. Suppose that, due to the successful lobbying efforts of sugar producers in the United States, Congress is going to levy a $0.50 per pound tariff on all imported raw sugar-the primary input of your product. In addition, Coke and Pepsi plan to launch an aggressive advertising campaign designed to persuade consumers that their branded products are superior to generic soft drinks. How will these events impact the equilibrium price and quantity of generic soft drinks? Explain your answer completely and illustrate with graphs.

Answer 1

1) Below graph shows the changes the generic drinks supplier will have to go through in the market after an increase in the cost of input and advertisement against the generic soft drinks.

Initially, the demand and supply for the generic dring will be at equilibrium point "a". The price would be P and quantity sold will be Q. Due to an increase in the price of the sugar which is an important input the price of the generic drink will increase. And this will shift the supply curve to the left. The new equilibrium will be at point "b" at a higher price P1 and lower quantity Q1. The supply curve will shift to S2 from S1.

After the Ad campaign by the big brand, the demand for the generic drinks will decrease even further. The new quantity demanded will be Q2 and price will be lower at P2. The equilibrium will be at point "C". The demand curve will shift from D1 to D2.