Suppose that annual demand in the U.S. market for ice cream cones can be expressed as QD = 800 + 0.2I - 100P, where QD is the number of cones demanded in millions of cones, I equals average monthly income in dollars, and P is price in dollars per cone. Supply can be expressed as QS = 200 + 150P (with the same units for quantity and price).
a. Graph the demand and supply curves for ice cream cones, assuming that average monthly income is $2,000, and solve for the equilibrium price and quantity.
b. Now assume that average monthly income drops to $750 and supply is unchanged. Draw the new demand curve on the same graph as used in (a) above and solve for the new equilibrium price and quantity. How would you describe the shift in demand intuitively?