The owner of a coffee shop is considering whether or not to raise the price of a standard cup of hot coffee at her store. What will happen to the number of cups of coffee she sells? Explain what the substitution and income effects of such a change would be.
What will be an ideal response?
The number of cups of coffee she sells will decrease because of the substitution and income effects of increasing price. Because of the substitution effect, some customers will respond to the price change by ordering another drink that costs less or by going to a different coffee shop that sells a standard cup of hot coffee for less. Because of the income effect, some customers will respond to the price change by ordering fewer cups of coffee at a time or by ordering a standard cup of hot coffee less frequently. This is because on their same budget, they cannot afford as many cups of coffee as they used to buy
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