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 United States, Congress is going to levy a $0.50 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 products are superior to generic soft drinks.

How will these events impact the equilibrium price and quantity of generic soft drinks?

1. Equilibrium price

a.may increase or decrease

b.will decrease

c.will increase  .

2. Equilibrium quantity

a.may increase or decrease  

b.will decrease  

c.will increase  .

Answer 1

(1) (a)

Increase in price of sugar, an input, will decrease production, which will lower market supply. The supply curve will shift leftward, increasing price and decreasing quantity. At the same time, heavy advertising against generic goods will decrease the demand for generic goods, shifting demand curve leftward, decreasing price and decreasing quantity. So the net effect on price is uncertain.

(2) (b)

In both the shifts, quantity will decrease. So the net effect is a definite decrease in quantity.