Question

1. Brands have been made illegal. People value high quality soda at $2/can and low quality soda at $1/can. High quality soda costs $1.75/can to make, while low quality soda costs $0.75/can to make.  

   1. What is the efficient outcome?  

   2. Assuming that consumers are willing to pay for soda based on the average quality in the market and that there are as many high and low quality sodas out there to start with, what is the equilibrium outcome in this market?  

Answer 1

Given, the price of high quality soda at $2/can

the price of low quality soda at $1 /can

But the cost of production of high quality soda at $1.75/can and the cost of low quality soda at $0.75/can.

Therefore , we conclude that the cost of production is very less in case of low quality soda with the available resource.

so, the efficient outcome is the  production low quality soda.

As it is assumed that consumers are willing to pay for soda based on the average quality in the market and both high and quality products are out there to start with , therefore we conclude that the consumer will purchase more of low quality soda. This is because of law of demand consumers wanted to purchase more at lower price and also substitute product(high quality soda) is relatively expensive also.