Answer to Question #267463 in Microeconomics for Jacquelyn sabanal

Question

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:

Tariffs tend to increase the price of imported goods since an importer has to pay a tax in the form of tariffs on the goods they are importing. The increased cost of goods is then passed onto consumers in the form of higher prices, thus resulting in a reduction in demand for those goods.

When the U.S. government reduces the tariff on imported coffee, this will result in the reduction of the price for imported goods and an increase in coffee supply, which will make them more affordable to consumers.

As such, there will be a huge demand for coffee due to its relatively lower price due to income and substitution effects.

 

Similarly, when the study showing that coffee drinkers have lower rates of colon cancer is released, this will encourage more consumers to start drinking coffee thus pushing up the demand for coffee in the market. The demand curve will shift to the right as more consumers demand coffee

 

This is depicted by the below graph: