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?

Answer 1

It can be mentioned that if there is a tariff for sugar the input prices become expensive as a result of which at the same budget the supply decreases as a result of which the supply curve shift to the left as shown in the first figure as a result of which the equilibrium price increases and quantity decreases.

In the second figure demand for generic softdrink decreases due to the aggressive advertising by Coca Cola and Pepsi as a result of which the quantity equilibrium decreases and price decreases

Because in both the cases the quantity is decreasing the equilibrium quantity decreases due to the effects and in one case the price is increasing and another case the prices decreasing the price change is ambiguous where it can increase and decrease depending on how intense the supply dominates or demand dominates