Question

3. Suppose that the demand for coffee increase and, at the same time, the supply of coffee decreases. If other things remain unchanged. Knowing that tea is a substitutable product for coffee, what would happen in the tea market? a) Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b) Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. c) Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d) Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. e) None of the above.

Answer 1

3) E is correct. It is given that demand increases and supply decreases for coffee. This will increase the price of coffee without any ambiguity. When coffee is expensive it's consumers will start consuming tea, its substitute and its demand will increase. this will increase both the quantity and the price again without ambiguity

1) D is correct. United States of America can produce greater quantity of both the products so it has absolute advantage in both of them. Opportunity cost of producing one car is lower in Canada which means it has comparative advantage in its production

2) B is correct. One TV can be produced by giving up one car in the United States and 2 cars in Canada which means the opportunity cost of producing one TV is greater in Canada.