Suppose the supply curve for wool is given by Qs = P, where Qs is the quantity offered for sale when the price is P. Also suppose the demand curve for wool is given by Qd = 10 − P + I , where Qd is the quantity of wool demanded when the price is P and the level of income is I. Assume I is an exogenous variable.
a) Suppose the level of income is I = 20. Graph the supply and demand relationships, and indicate the equilibrium levels of price and quantity on your graph.
b) Explain why the market for wool would not be in equilibrium if the price of wool were 18.
c) Explain why the market for wool would not be in equilibrium if the price of wool were 14.