Question

Consider the market for coffee beans. Suppose that the prices of all other caffeinated beverages go up 30 percent while at the same time a new fertilizer boosts production at coffee plantations dramatically. Which of the following best describes what is likely to happen to the equilibrium price and quantity of coffee beans?
A. Both the equilibrium price and the quantity will rise.
B. The equilibrium price will rise but the equilibrium quantity will fall.
C. The equilibrium price may rise or fall but the equilibrium quantity will rise for certain.
D. Neither the price change nor the quantity change can be determined for certain.
E. None of the above.

Answer 1

Answer:

A. Both the equilibrium price and the quantity will rise.

Explanation:

Coffee beans and caffeinated beverages can be described as substitute goods. The two products offer the same solutions to customers. A rise in the price of one will lead to an increase in demand for the other. Customers will avoid the expensive option, thereby increasing the demand for a cost-friendly product. A 30 percent increase in the price of caffeinated beverages will increase the demand and equilibrium quantity of coffee beans.

An increase in demand results in a rise in prices. The use of fertilizer to boost production will improve production and increase equilibrium quantity. The equilibrium price will remain high due to the increase in the prices of the substitute goods.