1) Suppose the following equations represent a supply and demand model for bubbl
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Question
1) Suppose the following equations represent a supply and demand model for bubble tea Os = 100 + 30P-107. Qd- 200 20P+5W ds (equilibrium condition) Where Qs is quantity supplied, P is the price of bubble tea, Tis the price of tapioca that goes in bubble tea, Qd is quantity demand, and Wis the weather (in degrees Fahrenheit) a) I this model, briefly explain whether you think Wis exogenous or endogenous and why. b) Pis endogenous in this model but Tis exogenous. Briefly explain why. c Suppose someone comes to you and says that really T-5+P+2Qs. If you add this equation to your model, is T still exogenous? Briefly explainExplanation / Answer
A) W is exogenous variable, as its value is not affected by other variables in the system. Weather is not affected by the quantity of bubble tea, its price and the price of Tapioca. It is value is determined by other factors.
B) Price of bubble tea (P) is endogenous as its value depends on the quantity demanded and quantity supplied of bubble tea. Since its value is influenced by the factors that are present in the system, it is an endogenous variable.
Tapioca (T) on the other hand is one of the ingredients of Bubble tea. It affects the price of bubble tea and hence its final quantity. However, its price is not determined by the price and quantity of bubble tea. Its value would depend on factors such as raw material required for its production. Hence it is exogenous.
C) In this equations, the price of Tapioca(T) depends on the price and quantity of bubble tea. So, it is no longer exogenous, since its value depends on factors that are in the system such as P and Q.
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