Question

As a manager of Coca-Cola you are worried about a drought because it will negatively affect corn production. The reason is that you use high fructose corn syrup (HFCS) as sweetener and corn is the main input to produce HFCS. Use a graph to explain how a drought affects the market for HFCS. Explain how the behavior of this market affects your company and the supply of your product. Pepsi and Dr Pepper also use HFCS as sweetener, do you expect their managers to worry about the drought too? Would you switch to sugar as sweetener?

Answer 1

As a manager of you are worried about a drought because it will negatively affect corn production. The It is given that Coca-Cola uses a high fructose corn syrup which uses corn as the main input. When there is a drought that reduces the supply of corn, the supply curve shifts left and this raises the price of corn. In the production of high fructose corn syrup, there is an increased cost of major input so that production of high fructose corn syrup is reduced as well. This shifts the supply curve left and causes its price to be higher.

Now that Coca-Cola uses a high fructose corn syrup, supply curve of Coca-Cola will shift left as the price of its major input, high fructose corn syrup, is increased. This increases the price of Coca-Cola and reduces its quantity.

Pepsi and Dr Pepper also use HFCS as sweetener. Hence, their managers would also be worried because they are also expecting the price of their product to rise and sales to drop.

Switch to sugar as sweetener depends on the price of sugar. If it is relatively cheaper than the now expensive high fructose corn syrup, managers can switch.