Question

You must show your work on all mathematical questions and I must be able to follow your steps.

As you’ve been studying the soft drink market, you’re quite convinced that consumer income is declining in the marketplace due to the COVID-19 pandemic. At this same time, Frosty Cola’s headquarters has informed you that it has closed three of its bottling plants in the Midwest. You have also come across the following data:

                        Income elasticity of demand for Frosty Cola = +0.9

            Using supply/demand analysis, what do you think is going on in the market for Frosty Cola right now? Illustrate and explain.

Answer 1

Income elasticity of demand of Frosty Cola = +0.9 which means Frosty Cola is a necessary good and consumer reduce their demand by little from D to D1 even if income falls due to COVID - 19. In addition to that, producers have closed their three of their botteling plants which will reduce supply of it and shift supply curve from S to S1. Both of these factors will result in rise in price and fall in quantity traded where equilibrium shifts from point A to C.