Q1.

A large Coca-Cola vendor recently hired some economic analysts to assess the effect

of a price increase in its 16-ounce bottles from $1.00 to $2.00. The analysts determined

that, on average, the vendor’s customers spend about $15.00 on soda (Coke and all other

brands) each week, and the average price for other 16-ounce soda bottles is $1.00. The

analysts also utilized some focus groups to determine the preferences of the vendor’s

customers. They used this analysis to build the following graph:

Suppose X0 = 9 and X1 = 7. Should the vendor expect to sell 7, more than 7, or less than

7 bottles of Coke after raising the price to $2.00 if Coke is a normal good? (LO4)

Find if Coke is a Normal good

As per the question, in this case, the normal goods can be divided into two effects: substitution and
income.

The substitution effect has a straight association with the consumers. It changes cheaper goods when
the price of the commodity rises. This effect always results in the fall in consumption of price-increased
goods and the increase in consumption of all the other goods. While the Income effect is the cause of
the decreasing consumption of both goods, it directly connects with the consumer's income. Also, their
consumption of goods will be reliant on their income.
If there is a price increase in soda, the final consumption will decrease by applying the substitution and
income effect. Also, both effects will fall in the same direction, causing final consumption to be less than
units.

Hence, we conclude that the vendor should expect to sell less than units of soda if there is a price
increase.

Q2. 22. In the aftermath of a hurricane, an entrepreneur took a one-month leave of absence

(without pay) from her $5,000-per-month job in order to operate a kiosk that sold fresh

drinking water. During the month she operated this venture, the entrepreneur paid the

government $2,500 in kiosk rent and purchased water from a local wholesaler at a price

of $1.34 per gallon. Write an equation that summarizes the cost function for her operation,

as well as equations that summarize the marginal, average variable, average fixed,

and average total costs of selling fresh drinking water at the kiosk. If consumers were

willing to pay $2.25 to purchase each gallon of fresh drinking water, how many units

did she have to sell in order to turn a profit? Explain carefully. (LO1, LO3)

Finding how many units of gallon she will have to sell to earn a profit.

Let's imagine she needs to sell x gallon in order to make a profit.

Now, the entire cost of operating a kiosk that sold fresh drinking water is $5000 per month due to no
pay, and the kiosk cost of rent is $2500. As a result, the total fixed cost is(7500+2500) The cost of raw
materials is now $1.34 per gallon. As a result, the total variable cost is:

TVC=1.34x

So total cost is,

TC=TFC+TVC

=1.34x*7500

Now, if customers were willing to pay $2.25 for each gallon of fresh drinking water, her total revenue
would be

TR=2.25x
As a result, in order to make a profit, she must sell at least the amount where TR=TC

TR=2.25x=1.34x+7500=TC

2.25x-1.34x=7500

0.91x=7500

X=8241.7582