Hershey expects to offset the pain of record-high cocoa prices as well as higher sugar costs by raising its prices of chocolate and candy.—CBC News, April 2, 2024.
SOME DATA
The price of cocoa has more than doubled over the past two years and has risen sharply since October 2023. Figure 1 shows the data.
Total revenue in the world market for chocolate in 2023 was $104 billion, up from $99 billion in 2022.
Hershey’s total revenue in 2023 was $11.2 billion (a market share of 10.7 percent) up from $10.4 billion in 2022 (a market share of 10.5 percent).
In what type of market does Hershey trade?
Hershey competes with many firms and producing many differentiated products, so the market is an example of monopolistic competition.
How does Hershey maximize its profit and what is its total revenue?
Hershey maximizes profit by producing the quantity at which marginal revenue equals marginal cost and setting the price of chocolate at the highest that its customers are willing to pay for that quantity. Figure 2 illustrates this outcome.
The demand for Hershey’s chocolate is the curve D and its marginal revenue is curve MR. At a low price of cocoa, marginal cost of producing chocolate is MC0. Hershey maximizes profit by producing 1,000 units per month, the quantity at which marginal revenue equals marginal cost of $5.00 per unit.
At that quantity, Hershey sets the price of chocolate at $13 per unit and its total revenue is $13 × 1,000 = $13,000.
How has the rise in the price of cocoa changed Hershey’s cost of production?
The rise in the price of cocoa increased Hershey’s variable cost and marginal cost of producing chocolate but it did not change its fixed cost
How would the rise in the price of cocoa have changed Hershey’s price of chocolate and total revenue, other things remaining the same?
The rise in the price of cocoa, with everything else unchanged, would have raised Hershey’s price of chocolate and decreased its total revenue.
When the price of cocoa rises, marginal cost rises, the profit-maximizing quantity decreases, and the price of chocolate rises. Figure 3 illustrates this outcome.
At a higher price of cocoa, marginal cost is MC1. Hershey maximizes profit by producing 750 units per month, the quantity at which marginal revenue, MR, equals marginal cost of $9.00 per unit.
At that quantity, Hershey sets the price of chocolate at $15 per unit and its total revenue is $15 × 750 = $11,250.
As the price of cocoa rises, the price of Hershey’s chocolate rises, but the quantity sold decreases and total revenue decreases.
The reason why Hershey’s total revenue decreases is that it faces an elastic demand curve for its chocolate.
Why has total revenue in the world chocolate market increased?
Total revenue in the world chocolate market increased because world population and income increased, which increased the demand for chocolate.
Chocolate is a normal good and likely an income-elastic good—a good the demand for which increases by a larger percentage than the increase in income.
How would the rise in world income have changed Hershey’s price of chocolate and total revenue, other things remaining the same?
The rise in world income increased the demand for Hershey’s chocolate. With other things remaining the same, Hershey’s price of chocolate, quantity produced, and total revenue would have increased.
Why did Hershey’s total revenue increase in 2023?
Hershey’s total revenue increased in 2023 because the effect of the increase in demand was greater than the effect of the higher price of cocoa.
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