Consider the Following Model of Demand and Supply of Coffee $\text { Demand: } Q_{i}^{\text {Coffee }}=\beta_{1} P_{i}^{\text {Coffee }}+\beta_{2} P_{i}^{\text {Tea }}+u_{i}$

question 41

Essay

Consider the following model of demand and supply of coffee:
$\text { Demand: } Q_{i}^{\text {Coffee }}=\beta_{1} P_{i}^{\text {Coffee }}+\beta_{2} P_{i}^{\text {Tea }}+u_{i}$
$\text { Supply: } Q_{i}^{\text {Coffee }}=\beta_{3} P{ }_{i}^{\text {Coffee }}+\beta_{4} P_{i}^{\text {Tea }}+\beta_{5} \text { Weather }+v_{i}$

(variables are measure in deviations from means, so that the constant is omitted).
What are the expected signs of the various coefficients this model? Assume that the price of tea and Weather are exogenous variables. Are the coefficients in the supply equation identified? Are the coefficients in the demand equation identified? Are they overidentified? Is this result surprising given that there are more exogenous regressors in the second equation?

---

Definitions:

Wages

Payments received by employees for their labor or services, typically calculated on an hourly, daily, or weekly basis.

Salaries

Compensation received by employees for their labor or services, typically on an annual, monthly, or hourly basis.

Rents

in economics, refers to the income generated from leasing properties or land; can also refer to excess profits not attributed to investment or innovation.

Dividends

Dividends are a portion of a company's earnings distributed to shareholders, representing a share of the profits.