Question

Part I (60%). News article: "Coca-Cola has developed a soft-drink vending machine that adjusts the price according to the weather. Price rises during warm weather and decreases during cooler weather." Think of a Coke machine in terms of market economics, that is, as having demand and supply. (You may find it helpful to illustrate for yourself.) Assume the supply curve is vertical to reflect that the machine gets refilled on some frequency, such as weekly. In other words, price does not affect quantity supplied. a) Based on economics as studied in this course, what is the benefit to consumers of price increasing in hot weather? (Tip: imagine you and another person walked up to a machine and there was only one can left in it.) b) The prevailing system of machines having just a fixed price, although not set by government, has what effect on pricing (causes the fixed price to effectively act as a what) during hot weather ?

Answer 1

(a) Since the prices have increased in hot weather, not everyone would be able to afford/ will be willing to pay high price for it. Imagining, that I and another person walked up to a machine and there was only one can left in it, we observe that prices are now higher. Now, I may be willing to pay such a high price, whereas other person may not. He may want to walk to other store and get drink at cheaper price. Hence, the problem is resolved by willingness to pay.

(b) This fixed price acts as a price ceiling, as other vendor will not be able to charge us more than this amount.