Substitute Goods and Demand Shifts

Steps:

• Recall that price is determined by supply and demand equilibrium.
• Identify factors shifting demand: changes in income, tastes, prices of related goods, or expectations.
• For substitutes like coffee, an increase in its price shifts tea demand rightward.
• Conclude the shift raises equilibrium price of tea.

Why C is correct:

• Law of demand for substitutes: If the price of a substitute (e.g., coffee) rises, consumers switch to tea, increasing tea demand and thus its price.

Why the others are wrong:

• A: Decrease in tea demand shifts curve left, lowering price.
• B: Decrease in substitute price draws consumers away from tea, decreasing tea demand and price.
• D: Increase in tea supply shifts curve right, lowering price.

Final answer: C