Consider the Pricing Strategy Outlined in the Excerpt Below

question 137

Multiple Choice

Consider the pricing strategy outlined in the excerpt below. Taking full advantage of the law of supply and demand, the Coca-Cola Company has quietly begun testing a vending machine that can automatically raise prices for its drinks in hot weather. "This technology is something the Coca-Cola Company has been looking at for more than a year," said Rob Baskin, a company spokesman, adding that it had not yet been placed in any consumer market. . . . The process appears to be done simply through a temperature sensor and a computer chip, not any breakthrough technology, though Coca-Cola refused to provide any details yesterday. While the concept might seem unfair to a thirsty person, it essentially extends to another industry what has become the practice for airlines and other companies that sell products and services to consumers. The falling price of computer chips and the increasing ease of connecting to the Internet has made it practical for companies to pair daily and hourly fluctuations in demand with fluctuations in price-even if the product is a can of soda that sells for just 75 cents.
Source: Constance L. Hays, "Variable-Price Coke Machine Being Tested," New York Times, October 28, 1999, C1.
If a "smart vending machine" were placed outside your classroom and it took other factors in addition to temperature into account when setting its price, what would likely happen to prices for caffeinated beverages during spring semester's exam week?

• A) Because most students elect to attend class during exam week, we expect lower demand for cola.
• B) Because students tend to run out of funds near the end of the academic year, we expect them to be very insensitive to changes in price.
• C) Because demand for chemical alertness would likely be higher during this time and the weather would be warmer, we expect the price of cola to be higher.
• D) Because this is an area that students visit on a regular basis, we expect them to notice the fluctuating prices and make alternative plans if they have price-inelastic demand.
• E) Because the supply of cola is consistent from week to week, we expect the demand for cola to remain unchanged.

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Definitions:

Socially Optimum

A condition or state in which resources are allocated in the most efficient manner from the perspective of the society overall, maximizing social welfare.

Public Park

An area of land, usually owned and maintained by government agencies, designated for public use and enjoyment, often featuring natural or landscaped spaces.

Pigouvian Subsidy

A subsidy on goods or services that have positive externalities, aimed at encouraging activities that are beneficial for society.

External Benefits

The positive effects or advantageous consequences of a product or service that are enjoyed by individuals or groups who did not directly purchase or consume the product or service.