"Coca-Cola has developed a soft-drink vending machine that adjusts the price according to the weather. (Price rises during warm weather and decreasesduring cooler weather)."
Think of a Coke machine in terms of market economics that is, as having demand and supply. (You may find it helpful to illustrate for yourself.) Assume the supply curve is vertical to reflect that the machine gets refilled on some frequency, such as weekly. (In other words, price does not affect quantity supplied.)
1) What is the benefit to consumers of price increasing in hot weather (Tip: imagine you and another person walked up to a machine and there was only one can left in it.)
In the hot weather, cold drink not only helps in quenching the thirst, but it provides a welcome relief from the heat waves. Therefore, the consumption levels also go up. In case the supply is limited then the stock will disappear in no time, because the consumers tend to collect some stock before it disappears from the dispenser. Coke will therefore not be available to people who feel the need of it in later hours. Therefore when prices is increased, there will lesser amount of hoarding of personal stock by the consumers, and the supply will be taken up by two types of consumers basically.
i. Those having enough paying capacity
ii. Those who are in dire need of it
2) Price is being allowed to act as what role
In this case price is playing a stabilising role by applying discriminatory pricing. Price discrimination by charging different prices from different groups of consumers under different circumstances helps in yielding good business to the company. In addition such a pricing helps in making the product available to the targeted customer segment.
3) The current prevailing system of machines having a fixed price has what effect on pricing (causes the fixed price to effectively act as a what)
The prevailing system of machines having fixed pricing helps in attracting more customers, and making loyal customers. Customer can plan a budget for his needs as per the requirements. But at the same time, if the price remains fixed during summers as well as during winters, the demand is bound to considerably go down during winter months. Though a bottle of Coke does not cost much, but as compared to the strategy of lower prices during winter months, the fixed pricing will act as a deterrent for ‘fence-sitters’.