📚 Learning Guide
Cross-Price Elasticity of Demand
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If the price of coffee increases, what is likely to happen to the demand for tea, assuming they are substitutes?

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Learning Path

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Choose the Best Answer

A

Increase

B

Decrease

C

Stay the same

D

Cannot be determined

Understanding the Answer

Let's break down why this is correct

Answer

When the price of coffee increases, many people who enjoy coffee might look for a similar drink that costs less, which is where tea comes in. Since coffee and tea can be substitutes for each other, a rise in coffee prices usually leads to an increase in the demand for tea. For example, if a cup of coffee goes up from $3 to $4, some coffee drinkers might decide to buy tea instead because it is still affordable at around $2. This shift happens because people want to save money while still enjoying a warm beverage. Overall, as coffee becomes more expensive, more customers will likely turn to tea, boosting its demand.

Detailed Explanation

When coffee gets more expensive, people might buy more tea instead. Other options are incorrect because Some might think that if coffee costs more, people will buy less tea; It's a common mistake to think that demand stays the same.

Key Concepts

Substitutes
Price sensitivity
Topic

Cross-Price Elasticity of Demand

Difficulty

medium level question

Cognitive Level

understand

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