Economics Question
Assume that demand for Coke is estimated as:
QC = 26 – 4PC + 2PP + 2AC + I + 9S where: QC = quantity demanded of Coke (ten million cases)
- PC = price of Coke (dollars per 10 cases)
- PP = price of Pepsi (dollars per 10 cases)
- AC = advertising expenditure on behalf of Coke (millions of dollars)
- I = per capita disposable income in the U.S. (thousands of dollars)
- S = variable equal to one in spring and summer and zero otherwise
Assume that the current price of Coke is $10 and the price of Pepsi is $8 (both per 10 cases). Coke spends $6 million on advertising and per capita disposable income in the U.S. is $20,000. It is currently summer.
- What is the current quantity demanded of Coke?
- Draw the demand curve for Coke, and write the equation.
- If Coke increased its advertising expenditure by $1 million, by how much would the quantity demanded of Coke change? Add the new demand curve to your graph.
- If the price of Pepsi increased by 10%, by what percent would quantity demanded of Coke change (and in what direction)? Based on this, are Coke and Pepsi substitutes or complements?
- Based on this information, is Coke a normal or inferior good? How do you know this?
- What is the current price elasticity for Coke? If the price of Coke increased by 10%, by how much would you expect quantity demanded to change? Is demand for Coke elastic or inelastic?
- What is the current consumer surplus from Coke? (Use the original demand curve.)
- Suppose Coke increased its price to $12. How much would consumers of Coke be willing to pay to avoid this price increase?
