Question

Consider the market for coffee. For each of the following scenarios, what would happen to total revenue after the price increases? Place each scenario in the correct category.

Items (5 items) (Drag and drop into the appropriate area below)

• Coffee drinkers say there is no substitute.
• Coffee drinkers decide to save their money for alcohol on Friday nights.
• Leaf rust damages one-third of the world's coffee crop.
• Brazil has a drought.
• Coffee drinkers discover a flavor of tea that tastes like coffee.

Categories

• Increase Total Revenue

• Decrease Total Revenue

• Cannot Determine

Answer 1

The following analysis is done assuming that coffee has inelastic demand.

1) Coffee drinkers say there is no substitute.

In the absence of any substitutes, the demand for coffee will lead to an incease in total revenue.

2) Brazil has a drought.

This will hamper the production of coffee and result in an adverse supply shock leading to an increase in total revenue by increasing price of coffee.

3) Coffee drinkers decide to save their money for alcohol on Friday nights.

This will lead to a decrease in total revenue since coffee drinkers have a budget constraint and if they decide to consume alcohol, then they have to reduce consumption of the other goods.

4) Coffee drinkers discover a flavor of tea that tastes like coffee.

In presence of a substitute, it is likely that there would be a decrease in total revenue as demand for coffee would fall relatively.

5) Leaf rust damages one-third of the world's coffee crop.

Again, this is an adverse supply shock which would lead to increase in total revenue.