Coke and Pepsi are substitute products (Besanko, Braeutigam & Gibbs, 2011). When the price of coke decreases, its consumers will demand more. Coke will substitute Pepsi for the new equilibrium point. The demand for Coke will increase. On the other hand, the quantity demanded for Pepsi will decrease because the product is very expensive. Therefore, the equilibrium price and quantity for the market of Pepsi will fall.
When the average incomes of households fall from $50,000 to $43,000, it means that they will have $7,000 less in their disposable income. Moreover, they will have less money to spend, and this will decrease the quantity demanded for Pepsi because they seem expensive to them.
An improvement in soft-drink bottling technology means that the company will be able to produce Pepsi at a cheaper cost. They can sell Pepsi at a cheaper price and produce more. Therefore, the equilibrium price will reduce while the equilibrium quantity will increase.
If the price of sugar increases, the cost of producing Pepsi will increase and this will raise the price while the quantity demanded decreases. However, a successful advertising campaign will increase both the equilibrium price and equilibrium quantity for Pepsi market. The demand curve for Pepsi will shift to the right while the supply curve will shift to the left.
Demand Equation: Qd = 100 – 4P
Supply Equation: Qs = 10 + 6P
Hint: Equate Qd = Qs. Solve for the equilibrium price and then the quantity.
At equilibrium, the quantity demanded equals the quantity supplied.
100-4P = 10+6P
-4p-6P = -90
-10P=-90 therefore, P=9
Equilibrium price =9
100-4(9) = 64=Qd
The equilibrium quantity = 64
With the price ceiling of $7, sellers are restricted from charging a price above the one set by the government. Therefore, the prevailing market price will be $7. There will be shortage of the product.
Quantity demanded will be 100-4(7) = 72
Quantity supplied will be 10+6(7)= 52
Per unit tax = $5.50-$4.25= $1.25
Consumers will pay= $5.50
Tax revenue = per unit tax × quantity sold (Besanko, Braeutigam & Gibbs, 2011)
Tax revenue= $1.25×18 = $22.5 Billion
Deadweight loss= ½(b×h)
½(5.50-4.25) × (20-18) = $1.25 Billion
Besanko, D., Braeutigam, R. R., & Gibbs, M. (2011). Microeconomics. Hoboken, NJ: John Wiley.
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