Question

Consider the market for Starbucks coffee. Suppose that the price of coffee beans (an input) increases, while the price of tea (a substitute) increases. What is certain to happen in the market for Starbucks coffee?

There will be a decrease in the equilibrium quantity of Starbucks coffee.

There will be a decrease in the equilibrium price of Starbucks coffee.

There will be an increase in the equilibrium price of Starbucks coffee.

There will be an increase in both the equilibrium price and quantity of Starbucks coffee.

There will be an increase in the equilibrium quantity of Starbucks coffee.

Answer 1

Ans is C

Substitutes goods are those goods which are used in place of each other.

When price of coffee beans imcreases then supply of starbucks coffee will decrease and shift the supply curve to the left due to which price of starbucks coffee increases and simultaneously the quantity of starbucks decreases.

When price of tea, a substitue good price rises there will be an increase in demand of starbucks.

Thus there are simultaneously two changes

1) supply decreases

2) demand increases

Both of them lead to increase in price.