A simplified version of Suits' model of the watermelon market is as follows*:
Demand equation: Pt = α0 + α1 (Qt /Nt ) + α2 (Yt /Nt ) + α3 Ft + u1t
Crop supply function: Qt = β0 + β1 ( Pt / Wt ) + β2 Pt-1 + β3 Ct-1 + β4 Tt-1 + u2t
where P = price
( Q/ N) = per capita quantity demanded
(Y/ N) = per capita income
Ft = freight costs
( P/ W) = price relative to the farm wage rate
C = price of cotton
T = price of other vegetables
N = population
P and Q are the endogenous variables.
a. Obtain the reduced form.
b. Determine whether the demand, the supply, or both functions are identified.