1)Where is Price set? 2)Explain how the current equilibrium price and quantity to the price of muffins rises, assuming that muffins and cereals are substitutes

1)The price is set where the demand curve intersect the supply curve. It is set by the buyers and sellers competitively. It shows that the new equilibrium is obtained where the equilibrium price and equilibrium quantity is achieved. It is the point of equilibrium where the free market equilibrium exists.

2)Recall that substitute goods are goods that are used in place of the other. For such goods, the cross-price elasticity of demand is positive. This means that an increase in the price of one good increases the demand for the other good and vice versa.

Therefore, if muffins and cereals are substitutes, an increase in the price of muffins would increase the demand for cereals. In the cereals market, the demand curve for cereals will shift upwards, increasing the equilibrium price of cereals as well as the equilibrium quantity traded in the market.