Question

"What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce steamed milk, which is used to make lattés, and scientists discovered that coffee prevents heart attacks?"

Answer 1

Answer: The equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous

Explanation: If latte shops begin to use machines that reduces the amount of labour required to make an essential ingredient of the coffee latte, it means that the quantity produced at equilibrium would increase. This would also be the case it is found that coffee prevents heart attacks. The demand for the Finished product (latte) would increase, leading to increased production and supply. Therefore, in this scenario, equilibrium quantity increases.

The effect on equilibrium price would be ambiguous due to the fact that the discovery of coffee preventing heart attack would raise the equilibrium price; while the ease of production using a machine would act to decrease it.