Answer to Question #245350 in Microeconomics for josh

Question

Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane

destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the

following questions.

a. What happens to the price of coffee beans?

b. What happens to the price of a cup of coffee? What happens to total expenditure on cups of

coffee?

c. What happens to the price of donuts? What happens to total expenditure on donuts?

Answer 1

a) Price of the coffee beans:

The figure 1 illustrates the price changes of the coffee beans.

In Figure-1, the horizontal axis measures the quantity supply and demand of the coffee beans and vertical axis measures the price level. The Cups of coffee and donuts are complement goods and having inelastic demand. At an inelastic demand curve, fall in quantity supply from Qs_1 to Qs_2 causes the price level to increase from P_1 to P_2. Therefore, a hurricane destroyed half of the coffee beans and which will cause to the supply of the coffee beans declines and the price of the coffee beans to increase.

b) Price of a cup of coffee:

The figure 2 illustrates the price of a cup of coffee beans and total expenditure.

In figure-2, horizontal axis measures the quantity supply and demand for a cup of coffee and vertical axis measures the price level. As a hurricane destroyed half of the coffee beans, the supply of coffee beans decreased from Qs_1 to Qs_2. This fall in supply of coffee beans will cause the price of a cup of coffee to increase from P_1 to P_2.

Since the demand is inelastic, increase in price will cause the total expenditure on a cup of coffee to increase when the price of a cup of coffee was P_1, the total expenditure on cup of coffee was the area of 0QB P_1. As the price increases, the total expenditure on a cup of coffee is increased to 0QB P_2.

c) Price of donut and total expenditure:

The figure 3 illustrates the price of donuts and total expenditure.

In Figure- 3, horizontal axis measures the quantity supply and demand for donuts and vertical axis measures the price of donuts. In the case of complementary goods, other things remain the same, increasing the price of one good leads to declines the demand for another good. Thus as an increasing price of coffee cups leads to a fall in demand for donuts from DD to DD_1 which causes to fall in price from P to P_1 and a lower expenditure on donuts.