Passing Along Costs: 1- Suppose the price of coffee beans increases by $0.20 per
ID: 1208685 • Letter: P
Question
Passing Along Costs:
1- Suppose the price of coffee beans increases by $0.20 per pound. What is the effect of this raw material priceincrease on the demand for roasted coffee? If one pound produces 50 cups of coffee, would the price of a cup of coffee rise by $0.01? Explain.
2- The article reports that J.M. Smucker Co. plans to increase its coffee prices by 9%. If Smucker has a lot of rivals but has a brand name that has vakue, will this 9% increase in retail prices imply that profits will rise by 9%?
3- Is it optimal for a firm to slash prices to retain market share? Is cutting prices during a recession and then raising them in a recovery a good strategy?
Explanation / Answer
If price of input increases then the price of finished good will also increase. Therefore, the effect of this raw material price increase on the demand for roasted coffee is that demand will be lower as prices are high. Therefore, the effect will not be much as they do not want to loose their market share.
No it is not necessary.