Assignment 2: The following graph will represent slices of pizza on the x-axis a

Question

Assignment 2: The following graph will represent slices of pizza on the x-axis and U.S. dollars on the y-axis. Please start at 5 slices of pizza and $5.00 as point A (equilibrium) Remember that the coordinates are (x, y). Use a 1 to 1 ratio for all the questions. Price $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 0 1 2 3 4 5 6 7 8 9 10 Quantity Pizza Market 1) Using the graph above at 5 slices of pizza and $5.00 (point A), how will the market for pizza look like when there is a $2.00 price increase affecting consumers? a. Why will the pizza market experience a market failure? What kind of market failure? b. How can this market be corrected?

Explanation / Answer

a) Market failure is a situation when there is a mismatch between the demand and supply of goods. If the price of the pizza increase by 2 dollars the demand will fall to 3 and the supply will increase to 7. It will cause a surplus of goods in the market.

b) Because there is a surplus in the market the price of the goods will fall to the point where the demand and supply will be equal again. The market failure will be corrected automatically.

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