Question

The coffee market is in equilibrium. Suppose we observe that coffee growers are using more

pesticides to increase coffee production. At the same time, we hear that the price of tea, a

substitute for coffee, is rising. Which of the following is a reasonable prediction for the new

price and quantity of coffee?

Price rises, but quantity is ambiguous.

Price falls, but quantity is ambiguous.

Price is ambiguous, but quantity rises.

Price is ambiguous, but quantity falls.

Both price and quantity are ambiguous

Answer 1

Price is ambiguous, but quantity rises.

Reasoning- When the production increases the supply goes up so the supply curve shift rightward and the quantity increased and the price decreases.

With the increase in the price of the substitute the demand of coffe will increase there by further increasing the quantity and increasing the price.

So we see that the quantity has overall increased but the effect on price is not clear as one thing is effecting it to go down and the other thing is bringing it up So the effect of price is ambiguous.