Question

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 US, Congress is going to levy a $.50 per pound tariff on all imported raw sugar-- the primary input for your product. In addition, Coke and Pepsi plan to launch an aggressive advertising campaign designed to persuade consumers that their branded product are superior to generics soft drinks.

How will these events impact the equilibrium price and quantity of generic soft drinks? Please explain in great detail.

Answer 1

The tariff leads to decrease in supply of sugar and hence the prices of sugar shall rise which form input products to soft drinks. Thus increasing soft drink prices will now lead to decrease in supply of generic soft drinks.

Now due to aggressive marketing by Coke and Pepsi the demand fir generic soft drinks shall reduce and hence the equilibrium quantity will reduce and so will the equilibrium prices.

Answer 2

Congress is going to levy a $0.50 per pound tariff on all imported raw sugar—the primary input for your product. As Sugar is an important input into the production of soda.Sure, there may be some substitution away from sugar towards other sweeteners but this will be limited by the impact of these alternative sweeteners on the taste and quality of the product..In the aggregate there will be a reduction in the supply of all softdrinks in the market.The reduction in supply means that the supply curve shifts up and to the left and intersects the demand curve at a higher price. Notice that there is a reduction in supply and a decrease in quantity demanded.This result is the same for all soft drink producers. The impact of Coke and Pepsi’s decision to advertise more and to advertise ‘against’ my generic soft drink will, given the supply reduction above, also cause the demand for my product to decrease and the demand for.