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.
a. What is the current quantity demanded of Coke?
b. Draw the demand curve for Coke, and write the equation.
c. 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.
d. 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?
e. Based on this information, is Coke a normal or inferior good? How do you know this?
f. 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?
g. What is the current consumer surplus from Coke? (Use the original demand curve.)
h. Suppose Coke increased its price to $12. How much would consumers of Coke be willing to pay
to avoid this price increase?
