Correct Option: B. The demand for tea will increase.
Detailed Explanation:
- Understanding Substitute Goods:
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Substitute goods are products that can replace each other in consumption. When the price of one substitute rises, consumers tend to buy more of the other substitute. In this case, coffee and tea are substitutes.
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Price Increase of Coffee:
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When the price of coffee increases, it becomes more expensive for consumers. As a result, some consumers will look for alternatives to coffee to avoid paying the higher price.
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Consumer Behavior:
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Given that tea is a substitute for coffee, consumers who previously bought coffee may switch to tea. This shift occurs because tea provides a similar utility (satisfaction) to coffee, and consumers will seek to maximize their utility while minimizing costs.
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Demand Curve Shift:
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The increase in demand for tea due to the rise in coffee prices can be illustrated by a rightward shift of the demand curve for tea. This means that at every price level, consumers are willing to buy more tea than before.
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Market Dynamics:
- As more consumers switch to tea, the demand for tea increases. This can lead to an increase in the price of tea if the supply does not change, as more people are competing to buy it.
Why Other Options Are Incorrect:
- Option A: The demand for tea will decrease.
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This option is incorrect because a decrease in the price of coffee would lead to a decrease in the demand for tea, not an increase. Since coffee's price is rising, consumers are more likely to buy tea, not less.
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Option C: The demand for tea will remain unchanged.
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This option is also incorrect. The demand for tea cannot remain unchanged when the price of its substitute (coffee) is increasing. The fundamental principle of substitutes dictates that an increase in the price of one leads to an increase in the demand for the other.
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Option D: The demand for tea will become perfectly elastic.
- This option is misleading. Perfectly elastic demand means that consumers will only buy tea at a specific price and will not buy any if the price rises even slightly. While the demand for tea may increase due to the price rise of coffee, it does not imply that the demand for tea becomes perfectly elastic. Demand elasticity is a separate concept that relates to how sensitive the quantity demanded is to price changes.
Summary of Key Points:
- Substitute goods are products that can replace each other; an increase in the price of one leads to an increase in demand for the other.
- When the price of coffee rises, consumers will likely switch to tea, increasing its demand.
- The demand curve for tea shifts to the right, indicating higher demand at all price levels.
- Understanding consumer behavior and market dynamics is crucial in analyzing the effects of price changes on demand.
This thorough understanding of the relationship between substitute goods and consumer behavior is essential for mastering concepts in economics, particularly in the context of demand analysis.