You are the manager of a firm that produces and markets a generic soft drink in a competitive market. In addition to the large number of generic products in your market, you also compete against major brands, such as Coke and Pepsi. Your production process is capital-intensive, relying on automation to produce your generic soft drinks. You have outsourced the transportation and delivery services to an outside firm and have a multi-year fixed priced contract that shields your firm from variation in transport and delivery costs.

a. You have just received an email that several consumer groups are launching an anti-soda campaign. Normally, you would ignore these campaigns, however, the groups are proposing to tax soda by value (an ad valorem tax) and to use the funds for a public health campaign that enjoys wide support. The proposed ad valorem tax would be 2 cents on each $1 dollar of value and, as such, proponents of the tax argue that it would not impact sales of soda at all and would not harm producers of soda. How would you respond to this argument? Ensure that you analyze the impact of the proposed tax and discuss whether the conclusions of the proponents have merit.

b. After defeating the proposed tax with your sound economic reasoning and a targeted advertising campaign, an economic consultant that you recently hired arrives to inform you that Coke and Pepsi are competitors (you knew this, but such are consultants) and that the cross-price elasticity of demand of your product with Coke and Pepsi are 2.5 and 1.75, respectively. Coke has recently announced a price increase of three (3) percent while Pepsi is holding price constant. If all else remains equal, what would be the impact on the quantity demanded of generic soda?