Question

1) Imagine that an unexpected storm destroys half of the world’s coffee bean crop. In which case is this event more harmful to the coffee bean farmers – if the demand for coffee beans is very elastic or very inelastic? Why?

2) Many people are enjoying the services of Uber, a company which provides car-rides from point A to point B, scheduled and paid via phone apps. Taxi drivers are not happy about this, as they believe Uber provides unfair competition. Do you think that Uber and Taxi rides are substitute goods or complementary goods? Why?

Answer 1

1) If the demand for coffee beans is very elastic, it is more harmful to the farmers. The destruction of half of the world's coffee beans crops will reduce the supply of coffee drastically. This will lead to a sharp increase in the price of coffee. Now if the demand for coffee is very highly elastic, the demand will contract by a lot and the equilibrium quantity will decline even further. On the other hand, if the demand is relatively inelastic the increase in price does not affect the demand much and the decline in equilibrium quantity is less and the farmers are better off.

2) Uber and taxi rides are substitute goods. People do not consume them together and as such, they are not complementary goods. The cross-price elasticity is indeed positive as people look for the cheaper option. All this points to the fact that they are substitute goods.