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    Coca-Cola vs. Pepsi: Price Increases, Utility, Income, and Substitution

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    1) What would be the consumer buying response to Coca-Cola if the price of Pepsi doubled?

    2) If the prices of Coca-Cola and Pepsi remained constant, what would be the consumers typical buying response to these products if their income was reduced by 30%?

    3) Suppose all carbonated beverages tripled in price. How would the concepts of utility, income, and substitution predict consumer behavior based on the rise in the cost of carbonated beverages?

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    Solution Preview

    1) If the price of Pepsi doubles, several consumers would change over to Coca Cola. The reason for this is that since price of Pepsi has doubled there would be several customers of Pepsi that would substitute Coca Cola for Pepsi. The point is that even though the tastes of Coca Cola and Pepsi are different, the difference is not so great that these cannot be substituted for one another, especially when the price of Pepsi is doubled.

    2) If the prices of Pepsi and Coca Cola remained the same and the income of the people was reduced by 30%, the quantity sold of both Coca Cola and Pepsi will decline. The assumption is that both Pepsi and Coca Cola are normal goods. Since, the income of the people has gone down; they will buy less of both these drinks and substitute it with a drink of lower cost or simply tap water. ...

    Solution Summary

    The solution gives a 528 word response, considering how income and substitution options of the consumers will go for each turn in price from. Includes references.