29. A Pepsi, a Business Decision PepsiCo has done a deal with 300 small Mexican

Question

29. A Pepsi, a Business Decision PepsiCo has done a deal with 300 small Mexican farmers close to their two factories to buy corn at a guaranteed price. PepsiCo saves transportation costs and the use of local farms assures it access to the type of corn best suited to its products and processes. “That gives us great leverage because corn prices don’t fluctuate so much, but transportation costs do,” said Pedro Padierna, presi- dent of PepsiCo in Mexico. Source: The New York Times, February 21, 2011 a. How do fluctuations in the price of corn and in transportation costs influence PepsiCo’s shortrun cost curves? b. How does the deal with the farmers to avoid fluctuations in costs benefit PepsiCo?

Explanation / Answer

Answer :- a.) Fluctuations in the price of corn and transportation costs shift Pepsi’s short-run cost curves. The cost of corn and transportation are variable costs, so when the price of corn and/or the cost of transportation rise, Pepsi’s short-run variable cost and short-run total cost curves shift upward.

b.) Pepsi lowers its costs in two ways first it will receive the type of corn that is best for production and would not have to incur opportunity cost in searching and second the transportation cost, the biggest headache, is now minimised. therefore, the deal is very beneficial for Pepsico.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.