Question

Matcha green tea is primarily cultivated by Japanese farmers. Suppose that Matcha green tea grows in popularity as its health benefits, namely its lower caffeine content, become known, and at the same time the government reduces taxes imposed on Japanese tea farmers. What is the likely effect on the equilibrium price and quantity in the Japanese Matcha tea market

Answer 1

Answer:

equilibrium quantity would increase

there would be an indeterminate effect on equilibrium price

Explanation:

Due to the increase in popularity of the tea, the demand for the tea would rise. This would lead to a rightward shift of the demand curve. Equilibrium price and quantity would rise.

If taxes are reduced, the cost of producing tea would reduce. This would encourage producers to start making tea. As a result, the supply of tea would increase. This would lead to a rightward shift of the supply curve for tea. As a result, equilibrium price would fall and equilibrium quantity would increase.

Taking these two effects together, there would be an increase in equilibrium quantity and there would be an indeterminate effect on equilibrium price