Question

Assume that coke and pepsi are substitute goods. Coke is able to purchase sugar at a lower price due to contract renegotiaons with a supplier. How will that impact the equilibrium price and quantity for Pepsi?

Group of answer choices:

Pepsi's equilibrium price will go down and equilibrium quantity will go down.

Pepsi's equilibrium price will go down and equilibrium quantity will go up.

Pepsi's equilibrium price will go up and equilibrium quantity will go down.

Pepsi's equilibrium price will go up and equilibrium quantity will go up.

Answer 1

It is given that good C and good P are substitutes of each other. It is given that C's cost of production falls as it purchases P at a relatively lower price than P. So, the quantity supplied of C will increase and the supply curve will shift rightwards which will reduce the equilibrium price of C. Since C and P are substitiutes of each other, a fall in price of C will reduce the demand of P as a result of which the demand curve of P will shift to the left causing a fall in the equilibrium price and equilibrium quantity both. Therefore, the correct answer is 'Option A'.