Marginal Pizza is a famous pizzeria in town, which is a competitive market. Below are a series of "changes" in the market for pizza where Marginal Pizza operates. For each of the changes, please provide the following two things:
WHAT happens to the price of pizza?
EXPLANATION for the change (if any), in the price of pizza
Make sure to refer to fixed costs, variable costs, and/or marginal costs in your answer.
I am providing THE answer to part (a), as an example, so that you know the format I am expecting in your answers (this means YOU DO NOT have to answer part (a).
(EXAMPLE)
a) The price of cheese goes up.
ANSWER
What happens to the price of pizza? - Increases
Explanation for the change (if any) in the price of pizza - cheese is an input in the production of most pizzas. An increase in the price of the inputs, increases the marginal costs of producing pizzas, which decreases supply and increases the market price.
b) A new restaurant tax of 50¢ per slice of pizza is imposed.
c) Marginal Pizza is discovered to be in violation of a safety code, and the violation is one that would be prohibitively expensive to correct. As a result, Marginal is certain to incur a fine of $500 per year from now on (assume Marginal Pizza will not go out of business as a result of paying the fine).
d) A new restaurant tax of $500 per year is imposed.