MT-445-02: Managerial Economics
1. Explain what would happen to equilibrium price and quantity in the market for Pepsi if the following occurred (be sure to indicate WHY it happens as well):
a. The price of Coke decreases.
If the price of Coke decreases and the price of Pepsi remains the same, Pepsi is now higher in price which will increase the quantity demand for Coke and the demand for Pepsi will fall down. If you are going to purchase a can of Pepsi, you may walk right past the Coke machine, but when you notice that the price of Coke has decreased and Pepsi is more in price, you will turn around and buy the Coke. At first you were not planning to purchase Coke, but now, at a decrease price, you are going to buy it. So the demand for Coke has increased. The demand curve has shifted to the right for Coke.
b. Average household income falls from $50,000 to $43,000.
If the average household income falls it depends on the household if the demand for Pepsi decreases or if it doesn’t. Some households can budget their money to still buy Pepsi’s if it is a normal good in their household. If it is not a normal good in the household and the budget for the household requires less money to spend on groceries, this will decrease the demand for Pepsi because the household will no longer be able to spare the money to buy the Pepsi like they were able to do before their income decreased. So the demand for Pepsi has decreased. The demand curve has shifted to the left for Pepsi.
c. There are improvements in soft-drink bottling technology.
If there are improvements in soft-drink bottling it would increase the supply of Pepsi and show outward shift of the supply curve. By this happening it will make the equilibrium to be higher in demand and decrease price. So the demand will be met faster for Pepsi and improve consumer confidence. Meaning Pepsi has increased in demand.
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