Economics 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? […]
