Assuming that coffee and tea are substitutes for consumers, which of the following is correct?

Question

BlackTom AI · Accepted Answer

First, clarify the scenario: coffee and tea are substitutes, so when the price of one rises, buyers tend to switch to the other. This implies a cross-price effect where the demand for the substitute increases when the price of the original good rises.
Option a: 'An increase in the price of tea will lead to a contraction in demand for coffee.' A contraction in demand means a decrease in quantity demanded due to a price change of the same good, or a movement along the demand curve caused by a price change of the good itself. Since tea and coffee are substitutes, the price increase in tea would not reduce demand for coffee; it would encourage more coffee consumption, so this option is incorrect.
Option b: 'An increase in the price of tea will lead to an expansion in demand for coffee.' While this statement acknowledges an increase in demand for coffee, it uses the term expansion to describe a shift in demand. In many economics texts, 'expansion' is reserved for an increase in quantity demanded due to a fall in the good's own price along its own demand curve, not for a cross-price effect. Since the change is due to tea’s price, the correct phrasing would be a rightward shift in coffee demand, not necessarily labeled as an 'expansion.' This makes the option ambiguously worded and thus not the best description.
Option c: 'An increase in the price of tea will lead to a decrease in demand for coffee.' This statement contradicts the substitutability between tea and coffee. If tea becomes more expensive, consumers substitute toward coffee, increasing, not decreasing, coffee demand. Therefore, this option is incorrect.
Option d: 'An increase in the price of tea will lead to an increase in demand for coffee.' This aligns with the substitution effect: when the price of tea rises, consumers substitute coffee, shifting coffee's demand curve to the right. It captures the correct cross-price effect and the direction of the change in demand for the substitute good.
Throughout, note that the core idea is the positive cross-price elasticity of demand for substitutes: as tea’s price goes up, coffee becomes relatively cheaper to consumers, boosting its demand.

Assuming that coffee and tea are substitutes for consumers, which of the following is correct?Single choice

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