1985/the cocacola comp was faced with soaring prices for sugar cane, 1-cent incr

Question

1985/the cocacola comp was faced with soaring prices for sugar cane, 1-cent increase in the price of sugar cane raised its total cost by$20million.Rather than raise the price, comp looke for a cheaper input and replced cane suger with corn sugar:

A.why couldn't cocacola simply raise the price of coke? (use eco terminology)

B. is sugat a fixed or variable input?

C.did the switch in the input lower:total cost?variable cost?fixed cost?average cost?average fixed cost?average variable cost? explain why

Explanation / Answer

The U.S. government has devotedly jacked up American sugar prices far above world market prices since the close of the War of 1812. The sugar industry is one of America's oldest infant industries %u2014 yet it dodders with the same uncompetitiveness that it showed during the second term of James Madison. Few cases better illustrate how trade policy can be completely immune to economic sense.

The U.S. imposed high tariffs on sugar in 1816 in order to placate the growers in the newly acquired Louisiana territory. In the 1820s, sugar plantation owners complained that growing sugar in the United States was "warring with nature" because the U.S. climate was unsuited to sugar production. Naturally, the plantation owners believed that all Americans should be conscripted into the "war." Protectionists warned that if sugar tariffs were lifted, then the value of slaves working on the sugar plantations would collapse %u2014 thus causing a general fall in slave values throughout the South.

In 1934, the U.S. government imposed sugar import quotas to complement high sugar tariffs and direct government subsidies to sugar growers. By the 1950s, the U.S. sugar program was renown for its byzantine, impenetrable regulations. Like most arcane systems, the sugar program vested vast power in the few people who understood and controlled the system. As author Douglas Cater observed in 1964, "In reviewing the sugar quotas, House Agriculture Committee Chairman Cooley has had the habit of receiving the [foreign representatives interested in acquiring sugar quotas] one by one to make their presentations, then summoning each afterward to announce his verdict. By all accounts, he has a zest for this princely power and enjoys the frequent meetings with foreign ambassadors to confer on matters of sugar and state."

Sugar quotas have also provided a safety net for former congressmen, many of whom have been hired as lobbyists for foreign sugar producers.

Since 1980, the sugar program has cost consumers and taxpayers the equivalent of more than $3 million for each American sugar grower. Some people win the lottery; other people grow sugar. Congressmen justify the sugar program as protecting Americans from the "roller-coaster of international sugar prices," as Rep. Byron Dorgan (D.-N.D.) declared. Unfortunately, Congress protects consumers from the roller-coaster by pegging American sugar prices on a level with the Goodyear blimp floating far above the amusement park. U.S. sugar prices have been as high as or higher than world prices for 44 of the last 45 years.

Sugar sold for 21 cents a pound in the United States when the world sugar price was less than 3 cents a pound. Each 1-cent increase in the price of sugar adds between $250 million and $300 million to consumers' food bills. A Commerce Department study estimated that the sugar program was costing American consumers more than $3 billion a year.

Congress, in a moment of economic sobriety, abolished sugar quotas in June 1974. But, on May 5, 1982, President Reagan reimposed import quotas. The quotas sought to create an artificial shortage of sugar that would drive up U.S. prices and force consumers to unknowingly support American sugar growers. And by keeping the subsidies covert and off-budget, quotas did not interfere with Reagan's bragging about how he was cutting wasteful government spending.

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