Question

Question 2

In the NPR news story “The Cost Of Corn Is Down, So Why Did The Cost Of Fritos At The White House Go Up?” (Oct. 12, 2018), a reporter (Scott Horsley) notes: “I came up to the employee break room to buy myself a bag of Fritos. And I noticed that the bag of Fritos had gone from a dollar and a quarter, the old price, to the new price of a buck and a half. And I had just written that corn futures had fallen 12 percent since May. So this was kind of puzzling to me.”

Another reporter (Stacey Vanek Smith) notes: “So our mystery–why are corn chips getting more expensive at a time when corn is getting cheaper?”

Suppose that corn chips like Fritos have a number of close substitutes and hence short-run changes in the market can be analyzed using a demand and supply framework. Then, which of the following could be valid explanations for the puzzling short-run increase in price as discussed in the quotes above? Choose all that apply. There may be more than one correct explanation.

Group of answer choices

(a) Cost of labor and transportation, other important components of the variable cost of corn chips, has gone up (more than offsetting the decline in cost of corn).

(b) The demand curve for corn chips has shifted to the right (or up, i.e., away from the Y-axis).

(c) Fixed costs associated with advertising corn chips has gone up, and part of this cost is being shifted to the consumers.

Answer 1

The price of any commodity is set equal to the MC into some markup. The markup is zero in case of a perfect competition and higher than 1 in case of imperfect competition.

Also, where TC is total costs, TVC is total variable cost, TFC is total fixed cost, MC is marginal cost, Q is quantity.

MC = arc _ drvc + dr FC _ dome dQ dQ

dTFC SO dQ
as fixed costs do not change with a change in quantity. Any change in TFC is due to external factors and not change in quantity.

Assume that the markup stays constant.

a) An increase in variable costs pushes up the MC. MC= change in total variable costs / change in quantity (shown in the equation above). Therefore, as variable costs go up significantly so as to counteract the decline in the cost of corn, the price of the good will rise.

Therefore, a can be a reason.

b) An increase in the demand for a quantity holding the supply constant will lead to an increase in prices as demand curve shifts to the right and supply curve doesn't.

Therefore, b can be a reason.

c) Here, the fixed costs have gone up. However, fixed costs do not affect the MC (as seen in the above equation). Therefore, c cannot be a reason at the first glance. However, the second part of c mentions that part of this cost is being shifted to the consumers. If this shift means that the mark ups are being adjusted upwards, then the prices may rise.

Therefore, c may or may not be a reason. It cannot be completely ruled out.