Answer to Question #228179 in Economics of Enterprise for Clement Paul

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 on all imported raw sugar leads to a decrease in the supply of sugar and thus the price of sugar which is an input product to processing soft drinks will increase. This will ultimately lead to a rise in prices of soft drinks and will automatically lead to a reduction in the supply of generic drinks .

The aggressive advertising campaign for coke and Pepsi will increase their market and will result in a fall in demand for generic soft drinks..

Hence, in this case, both equilibrium price and quantity will reduce.