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30 June, 05:03

12. A freeze in Peru causes the price of coffee to skyrocket. Assuming coffee and tea are substitutes, which of the following will happen?

[A] The quantity demanded of coffee will increase, and the quantity demanded of tea will increase.

[B] The quantity demanded of coffee will increase, and the demand for tea will increase.

[C] The quantity demanded of coffee will decrease, and the demand for tea will increase.

[D] The demand for coffee will decrease, and the quantity demanded of tea will increase.

[E] The demand for coffee will increase, and the demand for tea will increase.

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Answers (1)
  1. 30 June, 05:04
    0
    The correct answer is option C.

    Explanation:

    Suppose tea and coffee are substitutes. Now, unfavorable weather adversely affects coffee production leading to an increase in the price of coffee. This increase in coffee price will lead to a decline in the quantity demanded.

    Since tea is a substitute for coffee and people will prefer the cheaper substitute, the demand for tea, as a result, will increase. This will cause the demand curve for tea to shift to the right.
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