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? (Show Your Work)

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

As the cost of production decreases, the supplier would supply more coffee. So supply curve shifts to the right. And as coffee prevents heart attack, demand for coffee will be increased. Demand curve shifts to the right.

Case1- Supply curve shifts more than that of demand

In this case price decreases and quantity increases.

case 2: Demand shifts more than that of supply

In this case price increases and quantity increases

So the effect on price is ambiguous and quantity will be increased.