Question

In: Economics

Suppose that price of sugar, a major input for making Coca – Cola (Coke), decreased. Using...

Suppose that price of sugar, a major input for making Coca – Cola (Coke), decreased. Using two separate competitive supply/demand diagrams for Coke market, and Pepsi market, illustrate and briefly explain the probable effects of the decrease in the price of sugar: on equilibrium price, and equilibrium quantities, in the Coke and Pepsi market (assume Pepsi uses sweetener instead of sugar). What happens to the revenues of Coke, and Pepsi producers/sellers? [Hint: Coke and Pepsi are substitutes. First show how the decrease in the price of sugar will affect the Coke market. Then based on what happens to Coke prices, determine what will happen to the Pepsi market]

Solutions

Expert Solution

The decrease in the price of sugar decrease the business cost of producing Cockes , now the production of cockes become more cheap and this will induce the producers to increase the production. This is an increase in the supply of Cockes and the supply curve will shift to the rightwards and cause the equilibrium price to fall and the quantity to increase.

The Coke and the Pepsi most likely to be substitute goods, the substitute goods have a positive cross price elasticity of demand that is , an increase in the price of one good would increase the demand for the other good. In the given scenario , the price has decreased so a decrease in the price of Cocke would decrease the demand for the Pepsi. This is graphically illustrated below,

The decrease in the demand for Pepsi cause the equilibrium price and the quantity to fall. The revenue for the seller of the Pepsi would definitely fall because there is fall in price as well as demand.


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