Question

Assume this is the market for pizzas. Our economy goes into a recession and as a...

Assume this is the market for pizzas. Our economy goes into a recession and as a result, consumer wages just decreased by 10% (demand factor) at the same time the federal government raises taxes on pizza producers (supply factor). What predictions can we make with respect to equilibrium price (Increase, Decrease or Can Not Tell) and equilibrium qty (increase,Decrease or Can not tell)?
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Answer #1

Price: Cannot tell

Quantity: Decrease

A fall in consumer income will lower demand, shifting demand curve leftward, decreasing both price and quantity of pizza. At the same time, higher tax on pizza producers lower their profitability, so producers lower production, decreasing supply. The supply curve shifts leftward, increasing price and decreasing quantity. The net effect is a definite decrease in quantity. But price may increase, decrease or remain the same on basis of whether the leftward shift in demand curve is lower than, higher than or equal in magnitude to the leftward shift in supply curve.

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