Question

A key skill in economics is the ability to use the theory of supply and demand to analyze specific markets. In this week’s discussion, you get a chance to demonstrate your ability to analyze the effects of several “shocks” to the market for coffee. Choose one of the three scenarios below.

Scenario 1: Suppose that, as part of an international trade agreement, the U.S. government reduces the tariff on imported coffee. Will this affect the supply or the demand for coffee? Why? Which determinant of demand or supply is being affected? Show graphically with before- and after-curves on the same axes. How will this change the equilibrium price and quantity of coffee? Explain your reasoning.

Scenario 2: Suppose the National Institutes of Health publishes a study finding that coffee drinking reduces the probability of getting colon cancer. How do you imagine this will affect the market for coffee? Why? Which determinant of demand or supply is being affected? Show graphically with before- and after-curves on the same axes. How will this change the equilibrium price and quantity of coffee? Explain your reasoning.

Scenario 3: Combine parts 1 and 2. Suppose that the U.S. government reduces the tariff on imported coffee, and a reputable study is published indicating that coffee drinkers have lower rates of colon cancer. What will the combined impact be on the equilibrium price and quantity of coffee? Explain your reasoning and show graphically. Make sure you think this through carefully!

Answer 1

SOLUTION ;-

SCENARIO 1 )

It has been provided that as part of an international trade agreement, the U.S. government reduces tariff on imported coffee.

This reduction in tariff will increase the import of coffee in United States as tariff distorts trade and reduces imports.

This inflow of coffee into United States will increase the supply of coffee in United States.

In given case, taxation determinant of supply is being affected.

This determinant states that when government raises taxes or tariff or impose tax or tariff, supply get decreased and vice-versa.

So, with tariff being reduced, supply will, indeed, increase.

Following is the required graph -

SCENARIO 2 )

  Demand of coffee will increase because now people would find it more nutritious and will want to consume it more.
Determinant of demand affected is change in taste and preferences.
Demand curve will shift to right.
Equilibrium price and quantity will increase. Now people will want to consume more coffee because of the change in there preference so thus increasing their demand for it which in turn increases its quantity and price.