C2 Sunbest Orange Juice

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Sunbest Orange Juice is a product of California’s Orange County Growers’ Association. Both demand and supply of the product are highly sensitive to changes in the weather. During hot summer months, demand for Sunbest and other beverages grows rapidly. On the other hand, hot, dry weather has an adverse effect on supply by reducing the size of the orange crop. Demand and supply functions for Sunbest are as follows:

QD = 1,000,000 – 25,000,000P + 10,000,000PS + 1,600Y + 50,000T

QS = 8,000,000P – 100,000PL – 120,000PK – 150,000T

where P is the average wholesale price of Sunbest ($ per case), PS is the average wholesale price of canned soda ($ per case), Y is disposable income per household ($), T is the average daily high temperature (degrees), PL is the average price of unskilled labor ($ per hour), and PK is the risk-adjusted cost of capital (in percent).

During the coming planning period, a wide variety of operating conditions are possible. To gauge the sensitivity of demand and supply to changes in these operating conditions, a number of scenarios that employ a range from optimistic to relatively pessimistic assumptions have been drawn up in the tables below.

Demand and supply for Sunbest orange juice can be combined with data on the operating environment to construct estimates of demand, supply, and the amount of surplus or shortage under each operating scenario.

1. Set up a spreadsheet to illustrate the effects of changing economic assumptions on the demand for Sunbest orange juice. Use the demand function to calculate demand based on three different underlying assumptions concerning changes in the operating environment.

a. First, assume that all demand factors change in unison from levels indicated in Optimistic Scenario #1 to the levels indicated in Pessimistic Scenario #10.

b. Second, fix all demand factors except the price of Sunbest at Scenario #6 levels, and then...