Answer to Question #238797 in Microeconomics for salim

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

The equilibrium quantity will rise and price reduce because demand and supply will increase.

As shown above, the demand will shift to D2 and supply to S2. Therefore the equilibrium price will reduce to P1 and quantity rise to Q3.