Question

Suppose you observe that the price of pizza has gone down. Which of the following would be a valid explanation of the decline in the price of pizza?

a. More pizza shops open up

b. There is an increase in the price of cheese

c. People prefer to eat pizza instead of burgers

Answer 1

If more pizza shops get open then in that case supply of pizza will increase. Given the demand for pizza, increase in supply of pizza will lead to fall in price of pizza.

Increase in price of cheese will increase the cost of producing pizza. This will reduce the profit margin of pizza sellers and will compel them to reduce production and thereby supply. Given the demand for pizza, decrease in supply of pizza will lead to rise in price of pizza.

If people prefer to eat pizza instead of burgers then in that case demand for burgers will increase. Given the supply of pizza, increase in demand for pizza will lead to rise in price of pizza.

So,

If price of pizza has gone down then in that case this decline in the price of pizza is due to opening of more pizza shops.

Hence, the correct answer is the option (a).