Microeconomics Problem Set

This microeconomics assignment uses a case study focusing on Pepsi and the beverage industry. Students analyze the competitive landscape, comparing it to perfect competition and assessing the impact of factors like consumer preferences and cost changes on market equilibrium. The assignment also involves calculating profit maximization, understanding budget constraints, and applying marginal utility concepts. Specific questions involve identifying characteristics of Pepsi's industry, analyzing the effects of advertising, determining profit-maximizing output and price for a related firm (plastic bottle manufacturer), and interpreting the impact of various economic scenarios on Pepsi's market position. Finally, it includes a problem involving a consumer's budget constraint and utility maximization.

MICROECONOMICS
Question 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 then
used as raw materials in the production of different sodas on the market. Use the diagram
below to answer the following
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MICROECONOMICS
a) 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 their
products. 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 suffering
reduced 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 and
banana chips cost $40 each.
a) Write down the algebraic equation for Sandra’s budget constraint.
(3 marks)
b) Graph the Sandra’s budget
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MICROECONOMICS
(4 marks)
c) Calculate the opportunity cost of Pepsi for Sandra?
(2 marks)
d) Suppose Sandra’s marginal utility for the last unit of Pepsi is 500 utils and that of chips is
400 utils what should Shauna do to maximize her utility given that she spend all her
income on Pepsi and banana chips?
(3 marks)
Question 2 - (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.
5. Describe three features/characteristics of the industry in which Pepsi operate.
(3 marks)
6. 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)
7. Compare the beverages industry competitive environment to perfect competition in terms of
economic efficiency.
(3 marks)
8. R&D Company manufactures plastic bottles for the beverage industry. These bottles are then
used as raw materials in the production of different sodas on the market. Use the diagram
below to answer the following
3

MICROECONOMICS
f) What is the profit-maximizing level of output for this firm?
(2 marks)
g) What is the profit-maximizing price for this firm?
(2 marks)
h) Calculate the firm’s profit when it produces at the profit maximizing level of output.
(3 marks)
i) Is this firm in the short run or long run? Explain
(3 marks)
j) If the firm were operating in a perfectly competitive industry what will be its profit
maximizing price and output level.
(3 marks)
The End
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