Consider the simultaneous equation of demand and supply given by D = a0 + apt + aYt + u St= Bo + Bipt + BCt + u{, (Demand equation) (Supply equation) where yt is the income level while c is the observable production cost shifter (e.g., wages and interest rates). Because a higher income leads to a higher demand, a2 > 0. A higher marginal cost lowers the quantity supplied so that 32