Question

If consumers view cappuccinos and lattés as substitutes, what would happen to the equilibrium price and quantity of lattés if the price of cappuccinos falls? Both the equilibrium price and quantity would increase. Both the equilibrium price and quantity would decrease The equilibrium price would increase, and the equilibrium quantity would decrease. The equilibrium price would decrease, and the equilibrium quantity would increase.

Answer 1

There is a direct relation between price of substitute goods and the demand for concerned good. That is, we can say that with an increase in price of substitute good, the demand for concerned good will go up and vice versa.

If the price of cappuccinos fall, the demand for latte will also fall as the consumers will now find lattes relatively expensive and cappuccinos relatively cheaper. The demand curve for lattes will shift to the left, consequently the equilibrium price and quantity both will decrease.

The equilibrium price will decrease and the equilibrium quantity will also decrease