Coffee Demand Optimism in Times of Economic Decline

How does the demand for coffee typically respond to a decrease in income?

a. Pcoffee increases, Qcoffee increases
b. Pcoffee increases, Qcoffee decreases
c. Pcoffee decreases, Qcoffee increases
d. Pcoffee decreases, Qcoffee decreases
e. None of the above

Final answer:Option (c)

Answer:

When income decreases, demand for an inferior good usually increases. For coffee being an inferior good, one would expect that with a decrease in income, the demand for coffee would rise.

When the economy experiences an overall decrease in income and considering that coffee is an inferior good, we expect to see the opposite effect of a normal good with respect to changes in income levels. Inferior goods are those for which demand increases when income decreases, because they are seen as less desirable substitutes for more expensive goods.

Therefore, when income falls, people will demand more coffee since they cannot afford the more expensive luxury goods they would normally buy with a higher income. In this scenario, it would be logical to predict that Pcoffee decreases, Qcoffee increases, as the lower price incentivizes consumption of the inferior good while the reduced income leads to a shift towards goods that are cheaper.

However, if the question suggests that the price of coffee increases as well, this would not be a typical reaction to a decrease in income when it comes to inferior goods, so the best answer might be None of the above.