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Café owners notice that dropping the price of a cup of coffee from $5 to $4.50...

Café owners notice that dropping the price of a cup of coffee from $5 to $4.50 results in an increase in the number of cups of coffee they sell in a day from 30 to 32, assuming nothing else changes.

a) Based on this data, what is the price elasticity of demand for a cup of coffee? (Use the midpoint method, and show your workings). Is the demand for cups of coffee elastic or inelastic in this price range? Explain your answer.

As part of a turf war, drug lords in Columbia destroy large crops of coffee beans.

  1. b) Use a diagram (see also part (c) below) to illustrate the impact of the turf war on the equilibrium quantity and price of coffee beans. How is a new equilibrium price established? ( Note: Do not use actual numbers for price and quantity; instead use symbols such as P1 and Q1; make sure you explain what these symbols represent.)

  2. c) Given the price elasticity of demand you calculated for part (a), analyse and discuss who is likely to bear the greater impact of the changed price of a cup of coffee that results from the turf war – consumers or producers of cups of coffee? Use the diagram you drew for part (b) to illustrate and explain your answer.

  3. d) Customers notice that not only has the price of a cup of coffee changed, but the price of cakes has decreased. Are these two things related? Explain your answer.

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