Question

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.

Answer 1

The correct answer is option C.

Step-by-step 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.