Answer to Question #279115 in Microeconomics for Leen

Question

You are a manager of the 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 successful lobbying efforts of sugar producers in kilombero,parliament is going to levy a $0.50 per pound tarrif on all imported raw sugar-the primary input for your product.In addition,Coke and Pepsi plan to launch aggressive advertising campaign designed to persuade customer that their branded products are superior to generic soft drinks.How will these events impact the equilibrium price and quantity of generic soft drinks? (10 points)

Answer 1

1st CASE:

Tariff Imposition on raw sugar

The imposition of tariffs on sugar will decrease the supply curve of the generic type of soft drink. This effect will increase the equilibrium price and will decrease the equilibrium quantity of the generic type soft drinks. Being a small firm will lead to a large effect of this fall in supply as variable costs are high relatively. This is true as the firm must be experiencing increasing returns to scale in the production of soft drinks.

2nd CASE:

Increasing Advertisements With the increase in the costs, the firm might try to increase the price of sugar. This will benefit Coca-Cola as they will be harmed relatively lower by the tariffs. Coke and Pepsi might also start increasing product advertising, this will lead to a fall in the demand curve of the generic soft drinks. The equilibrium price will now fall and quantity will decrease further.