In the market for coffee, suppose tea is a substitute for coffee. If the price of tea increases, what happens to the demand for coffee (all else equal)?

• A. There is a movement along the coffee demand curve to a higher quantity demanded.
• B. The demand curve for coffee shifts to the right (demand increases).
• C. The demand curve for coffee shifts to the left (demand decreases).
• D. There is no effect on coffee demand because substitutes do not affect demand.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of substitutes in microeconomics. Substitutes are goods that can replace each other in consumption, meaning if the price of one good rises, consumers may switch to the other good.
2. Step 2: Identify the relationship between tea and coffee. Since tea is a substitute for coffee, an increase in the price of tea makes tea more expensive relative to coffee.
3. Step 3: Analyze the effect of the price increase of tea on coffee demand. Because tea is now more expensive, consumers will tend to buy more coffee instead, increasing the demand for coffee.
4. Step 4: Distinguish between a movement along the demand curve and a shift of the demand curve. A movement along the demand curve happens when the price of the good itself changes, while a shift in the demand curve occurs when other factors (like the price of substitutes) change.
5. Step 5: Conclude that since the price of tea (a substitute) increased, the demand curve for coffee shifts to the right, indicating an increase in demand for coffee at every price level.