2. Draw typically shaped supply and demand curves for hot dogs and indicate the equilibrium price and quantity. Use the graph to illustrate what will happen to the equilibrium price and quantity of hot dogs if there is an increase in income in the economy and explain.

To address this question, I will describe the process of drawing the supply and demand curves for hot dogs, indicate the equilibrium price and quantity, and explain how an increase in income affects the equilibrium price and quantity.<br /><br />---<br /><br />### Step 1: Draw Supply and Demand Curves<br />1. **Axes**:<br /> - The vertical axis represents the price of hot dogs (P).<br /> - The horizontal axis represents the quantity of hot dogs (Q).<br /><br />2. **Demand Curve (D)**:<br /> - The demand curve slopes downward from left to right, reflecting the law of demand: as the price decreases, the quantity demanded increases, and vice versa.<br /><br />3. **Supply Curve (S)**:<br /> - The supply curve slopes upward from left to right, reflecting the law of supply: as the price increases, the quantity supplied increases, and vice versa.<br /><br />4. **Equilibrium**:<br /> - The point where the supply curve (S) intersects the demand curve (D) is the equilibrium point.<br /> - At this point, the equilibrium price (P*) and equilibrium quantity (Q*) are determined.<br /><br />---<br /><br />### Step 2: Illustrate the Effect of an Increase in Income<br />- An increase in income typically shifts the demand curve. Whether the demand for hot dogs increases or decreases depends on whether hot dogs are a **normal good** or an **inferior good**:<br /> - If hot dogs are a **normal good**, higher income leads to an increase in demand, shifting the demand curve to the right (D → D1).<br /> - If hot dogs are an **inferior good**, higher income leads to a decrease in demand, shifting the demand curve to the left (D → D2).<br /><br />For this explanation, we will assume that hot dogs are a **normal good**.<br /><br />---<br /><br />### Step 3: Graphical Representation<br />1. **Initial Equilibrium**:<br /> - Label the initial demand curve as "D" and the initial supply curve as "S."<br /> - Mark the initial equilibrium price as P* and the initial equilibrium quantity as Q* at the intersection of D and S.<br /><br />2. **Shift in Demand**:<br /> - When income increases, the demand curve shifts to the right (D → D1), indicating higher demand at every price level.<br /><br />3. **New Equilibrium**:<br /> - The new demand curve (D1) intersects the supply curve (S) at a new equilibrium point.<br /> - The new equilibrium price (P1) is higher than the initial price (P*), and the new equilibrium quantity (Q1) is greater than the initial quantity (Q*).<br /><br />---<br /><br />### Step 4: Explanation<br />- **Reason for Price Increase**:<br /> - As demand increases due to higher income, there is more competition among buyers for the same quantity of hot dogs, driving up the price.<br /> <br />- **Reason for Quantity Increase**:<br /> - Higher prices incentivize producers to supply more hot dogs, leading to an increase in the equilibrium quantity.<br /><br />---<br /><br />### Final Answer<br />The graph should show:<br />1. Downward-sloping demand curve (D) and upward-sloping supply curve (S).<br />2. Initial equilibrium price (P*) and quantity (Q*).<br />3. A rightward shift of the demand curve (D → D1) due to increased income.<br />4. New equilibrium price (P1) and quantity (Q1), both higher than the initial values.<br /><br />This illustrates that when income increases and hot dogs are a normal good, both the equilibrium price and quantity of hot dogs rise.