44 Assignment Solution: Supply and Demand of Coffee
Solution
Scenario 1: A tariff reduction translates to an increase in the supply of coffee, which we can show as a rightward shift in the supply curve. Tariffs can be interpreted as a production (or sales) cost, so a tariff cut, is a decrease in production cost. The rightward shift in supply results in a lower equilibrium price and a higher equilibrium quantity.
Scenario 2: A positive report from the NIH about coffee consumption should increase tastes & preferences for coffee, increasing demand. This can be shown by a rightward shift in the demand curve, resulting in a higher equilibrium price and a higher equilibrium quantity.
Scenario 3: Combining Scenarios 1 & 2 shifts both supply & demand curves to the right. The equilibrium quantity clearly increases, but what happens to the equilibrium price is indeterminate without information about which curve shifts more. If they shift by the same amount, the equilibrium price will remain the same, but we can’t say that for sure without information about the magnitudes of the shifts.