Question

1. Simple Supply and Demand. Q = 60-10P+2Y Q = 100+5P-15Pc P= Price of pizza Y = Aggregate income P = Price of fresh mozzarella a. Identify the exogenous and endogenous variables: b. Solve for p in terms of the exogenous variable. c. Let Y = 10 and Pc = 2. Solve for the equilibrium P and Q d. Suppose Y increases to 12: i. Present a graph showing the impact of the increase in Y(which curve moves which way). ii. Solve for the new equilibrium P and Q.

Answer 1

1. The variables that cannot be controlled and are determined outside the model are exogeneous variables. Here, income of the consumers and the price of mozaralle are exogeneous variables.

2. In equilibrium,

demand = supply

60-10P+2Y=100+5P-15Pc

2Y+15Pc=40+15P

(2Y+15Pc-40)/15=P

3. if Y=10 and Pc=2

P=(2Y+15Pc-40)/15

=(20+30-40)/15

=10/15=0.67

Q=100+5.0.67-15(2)

Q=73.35