Answer:
A) What happens to the price of coffee beans?
- the price of coffee beans will skyrocket since its demand is inelastic, a price increase will decrease the quantity demanded in an smaller proportion.
B) What happens to the price of a cup of coffee?
- this is a tricky question because generally the price of coffee should increase in a similar manner than the price of its key ingredient (coffee beans) but since the price of coffee beans only represents 1% of the price of coffees, I guess it will increase but not as much.
What happens to total expenditure on cups of coffee?
- the total number of cups of coffee will decrease but in a smaller proportion than its price increase, e.g. if the price of a cup of coffee increases by 10%, the demand will decrease by 5%.
C) What happens to the price of donuts?
- the price of donuts should not be affected at all because, at least not from an economic point of view. If you analyze it from a marketing point of view it might increase or decrease depending on consumers react to the price increase of coffee. E.g. maybe consumers are willing to sacrifice their donuts in order to keep consuming coffee and that would cause a steep decrease in the demand of donuts and a steep decrease in the price. But this is just an option.
What happens to total expenditure on donuts?
- it will decrease at least in the same proportion as the demand of cups of coffee, but I believe it should probably be in a larger proportion because coffee triggers the demand of donuts. The main product is coffee and if the price of coffee increases, many people will stop buying donuts in order to keep consuming expensive coffee.
