Question

Assume that we are looking at the local market for pizza. Assume that the equilibrium price is $20 and the equilibrium quantity is 1000. Which of the following options best describes what would happen to this market if two new pizza restaurants open up for business in this market?

1. Supply would increase causing a surplus situation. Prices would then decline and this causes quantity supplied to decrease and quantity demanded to increase, this continues until there is a new equilibrium at a lower price and higher quantity.
2. Demand would decrease causing a surplus situation. Prices would then decline and this causes quantity supplied to increase and quantity demanded to decrease until the new equilibrium is reached at a lower price and lower quantities.
3. Supply would decrease causing a surplus situation. Prices would then decline and this causes quantity supplied to increase and quantity demanded to decrease until the new equilibrium is reached at a lower price and lower quantities.
4. Demand would increase causing a surplus situation. Prices would then decline and this causes quantity supplied to increase and quantity demanded to decrease until the new equilibrium is reached at a lower price and lower quantities.

Answer 1

1. Supply would increase causing a surplus situation. Prices would then decline and this causes quantity supplied to decrease and quantity demanded to increase, this continues until there is a new equilibrium at a lower price and higher quantity.

Step-by-step explanation:

Since in the question, it is given that the two new pizza restaurants are entered in the market that reflects increment in the number of sellers. Due to an increase in sellers, the supply curve shift to rightward. This will result in a decrease in the equilibrium price and an increase in equilibrium quantity

And we know that there is a direct relationship between the price and quantity supplied and there is an inverse relationship between the price and the quantity demanded