Two types of coffee, Arabica and Robusta, are substitutes and both are grown and consumed in...

Two types of coffee, Arabica and Robusta, are substitutes and both are grown and consumed in Vietnam. Following a government incentive program, the number of farms growing Arabica increases in Vietnam. (a) What is the impact on the market for Arabica in Vietnam? Please explain, using a graph of demand and supply of Arabica, and please label the graph completely. (b) What is the impact on the market for Robusta in Vietnam? Please explain, using a graph of demand and supply of Robusta, and please label the graph completely.

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Expert Solution

Market of Arabica

In the below figure, X – axis shows the quantity of Arabica and Y-axis shows the price of Arabica. Initially the Demand curve DA1 and the Supply curve SA1 intersect at market equilibrium E1. The equilibrium level of quantity is given by QA1 and the equilibrium price level is given by PA1.

When the number of farms growing Arabica increases due to the government incentive program, it means there is an increase in the amount of input (land) for Arabica production. With greater amount of land more Arabica can be produced leading to an increase in the supply of Arabica in Vietnam. This causes a rightward shift in the supply curve of Arabica from SA1 to SA2. The market equilibrium shifts to EA2 where the initial demand curve DA1 and the new supply curve SA2 intersects. At the new equilibrium, the quantity supplied for Arabica rises to QA2 and the prices of Arabica falls to PA2.

Market of Robusta

In the below figure, X – axis shows the quantity of Robusta and Y-axis shows the price of Robusta. Initially the Demand curve DR1 and the Supply curve SR1 intersect at market equilibrium E1. The equilibrium level of quantity is given by QR1 and the equilibrium price level is given by PR1.

Given that, Arabica and Robusta are substitutes – A fall in the price of Arabica caused due to its increased supply, makes Robusta relatively expensive than Arabica. Due to higher prices of Robusta, consumers respond by purchasing more of Arabica as compared to Robusta. Thus, demand for Robusta falls and causes a downward shift in its demand curve from DR1 to DR2. The market equilibrium moves to E2 where the initial supply curve SR1 and the new demand curve DR2 intersects. At the new equilibrium, the quantity demanded for Robusta falls to QR2 and the prices of Robusta falls to PR2.

Rahul Sunny answered 2 years ago

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