Question

What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce steamed milk, which is used to make lattés, and scientists discovered that coffee prevents heart attacks?a. Both the equilibrium price and quantity would increase.
b. Both the equilibrium price and quantity would decrease.
c. The equilibrium price would increase, and the effect on equilibrium quantity would be ambiguous.d. The equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous.

Answer 1

Answer: D. The equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous.

Explanation: It follows that the quantity of latte produced would increase given that the newly introduced machine reduces the amount labour required and also is more efficient. Therefore more quantities of latter will be produced in short periods. Same thing would occur when it is discovered that the coffee used in producing lattes prevent heart attacks.

In both instances, the equilibrium quantity increases. However, equilibrium price is ambiguous, this is because the discovery that coffee prevents heart attacks would serve to push up prices of latte since suppliers would want to cash in on that, while the use of machines would push price down as a result of mass production.