Question

You are interested in the market for Starbucks coffee. The price of Thomas Hammer Coffee (a...

You are interested in the market for Starbucks coffee. The price of Thomas Hammer Coffee (a substitute) decreases and at the same time the price of the coffee beans that Starbucks uses in its coffee production decreases. As a result, we notice that the price of Starbucks coffee went down and that fewer cups of Starbucks coffee are being sold. Which of the following best explain these changes?

Group of answer choices

The demand for Starbucks coffee increased and the supply of Starbucks coffee also increased.

The demand for Starbucks coffee decreased and the supply of Starbucks coffee also decreased.

The decrease in the demand for Starbucks coffee was greater than the increase in the supply of Starbucks coffee

The increase in the supply of Starbucks coffee was greater than the decrease in the demand for Starbucks coffee

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Answer #1

Correct option: The decrease in the demand for Starbucks coffee was greater than the increase in the supply of Starbucks coffee

Reason: With a fall in price of substitute coffee, demand for Starbucks coffee would reduce, shifting demand curve to the left

With the fall in price of coffee beans, cost of production of Starbucks coffee would decrease, shifting supply curve to the right

If the fall in demand was greater than increase in supply, both price and quantity sold of Starbucks coffee would fall.

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