MICROECONOMICSQuestion 1 - (25 marks)Read the following passage carefully and answer questions The beverages industries in which Pepsi operate are highly competitive. They compete with major international beverage companies in multiple geographic areas. The Coca-Cola Company is their primary competitor and they compete on the basis of price, quality, product variety, distribution, marketing and promotional activity. If they are unable to compete effectively, they may lose their market share and this will have an adverse impact on their revenues and profit margins.1.Describe three features/characteristics of the industry in which Pepsi operate.(3 marks)2.Although Coca-Cola and Pepsi sell very similar products they spend millions of dollars each year to market their products to customers. Explain one advantage and one disadvantages of advertising on society.(6 marks)3.Compare the beverages industry competitive environment to perfect competition in terms of economic efficiency.(3 marks)4.R&D Company manufactures plastic bottles for the beverage industry. These bottles are thenused as raw materials in the production of different sodas on the market. Use the diagram below to answer the following 1
MICROECONOMICSa)What is the profit-maximizing level of output for this firm? (2 marks)b)What is the profit-maximizing price for this firm?(2 marks)c)Calculate the firm’s profit when it produces at the profit maximizing level of output.(3 marks)d)Is this firm in the short run or long run? Explain(3 marks)e)If the firm were operating in a perfectly competitive industry what will be its profit maximizing price and output level.(3 marks)Pepsi Company operates in a highly competitive market and relies on continued demand for theirproducts. To generate revenues and profits, they must sell products that appeal to their customers. Any significant changes in consumer preferences or any inability on their part to anticipate or react to such changes could result in reduced demand for our products and erosion of our competitive and financial position.1.For each of the following draw well labelled graphs that illustrates the likely effect on the MARKET for Pepsi. Indicate in each case the impact on equilibrium quantity (Q) and equilibrium price (P) for PEPSI.a)Consumer preferences shift away from the product as various Medical Associations warns that drinking Pepsi may lead to obesity(5 marks) b)Unexpected increases in raw materials and energy costs.(5 marks)2.Pepsi will not be able to increase their prices to offset these increased costs without sufferingreduced volume, revenue and operating income because the price elasticity of demand for its product is inelastic. a)Do you agree or disagree with this statement? (1 mark)b)Explain your answer to part a above. (2 marks)3.Suppose Sandra has $1600 to spend only on Pepsi and banana chips. Pepsi cost $80 each andbanana chips cost $40 each.a)Write down the algebraic equation for Sandra’s budget constraint.(3 marks)b)Graph the Sandra’s budget2
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