Answer to Question #226272 in Economics of Enterprise for sulo

Question

You are the manager pf 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 branch such as Coca-Cola and Pepsi. Suppose that , due to successful lobbying efforts of sugar producers in the Sri Lanka, Ministry of Finance is going to levy a Rs. 100 per Kg 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

The tariff leads to decrease in supply of sugar and hence the prices of sugar shall rise which form input products to soft drinks. Thus increasing soft drink prices will now lead to decrease in supply of generic soft drinks.

Now due to aggressive marketing by Coke and Pepsi the demand fir generic soft drinks shall reduce and hence the equilibrium quantity will reduce and so will the equilibrium prices.