CFA Practice Question
Which one of the following would most likely increase the demand for coffee?
A. A decrease in the price of coffee
B. An increase in the price of tea, a close substitute
C. A drought in the coffee-producing regions of Brazil
Explanation: An increase in the price of a substitute good (tea) increases the demand for the good since consumers will switch their consumption to the now relatively less expensive good.
User Contributed Comments 15
| User | Comment |
|---|---|
| humphrey | WHAT'S WRONG WITH A? |
| jason | a decrease in the price of coffee will increase the quantity demanded, not the demand! |
| photoshop | Choice A stands for the move along the demand curve, while choice B will change the demand curve. |
| ylepape | more impact through decline of price on demand than through substition ... basic econometrics ! Demand different from quantity demanded ?? |
| option | So, it comes down to whether the question is asking for change in quantity demand or shift in demand curve. A clearly defined answer will resolved this issue. |
| Iceblue | good question! |
| kamal3r | A and B are equally valid - you just cant imagine restrictive parameters which suits one person or the other. The Question is not well defined. |
| joshnick | I believe the answer is C because the demand for coffee is very inelastic, so an increase in price of substitute would increase coffee demand more than a decrease in coffee price. Since change in coffee prices has little effect on quantity demanded C is best answer. |
| julamo | I understand the "CFA logic" of the answer but in reality it doesn't make any sense. Price increase leads to increase in quantity demanded but not demand??? What about people who usually don't buy coffe but decide to try as the price becomes attractive? And even if the price of tea decreases, people might not want to give it up for coffee, not matter how close of a substitute you think it is. My point is, to me, nothing in reality can increase demand more than a decrease in price (or noticeable improvement in quality).... what do you think? |
| julamo | you'll understand "price decrease" at the end of the first line... |
| dlukas | Demand and quantity demanded not the same thing. "Demand" denotes the relationship between price and quantity demanded at all prices from zero to infinity, and is synonymous with the demand curve. A change in demand of good X cannot be caused by a change in the price of X, because every possible price of X has a corresponding point on the demand curve--the quantity demanded AT that given price. |
| pepper | shift in demand curve vs. movement along the demand curve |
| Mgtw | "increase the demand" = shift in demand curve "increase in the quantity demanded" = movement along demand curve (caused only by change of price) |
| tommyguard3 | Decrease in price creates an increase in quantity demanded not increase in demand, it is a shift along the demand curve, but that demand will not be met as companies are unwilling to meet the demand at that price. This is an inefficient market. An increase in demand is something that shifts the demand so that an efficient market would demand and supply a higher amount. |
| pigletin | In real cfa exam it will ask you which one will shift demand curve to the right or left. CFA no little dirty wording tricks |