Problem 2. (SW 12.8.) Consider a product market with a supply function Q = Bo + B₁ P₁ + už, a demand function Q = %o +u, and an equilibrium condition Q = Q, where u and u are mutually independent i.i.d. random variables, both with a mean of 0. (a) Show that P₁ and us are correlated. OLS (b) Show that the OLS estimator of ₁ is inconsistent. Hint: The standard strategy for showing inconsistency: first, argue that Cov(QP), second, use Var(P) calculations to show that Cov(Q²,P) #B₁. will converge in large samples to Var(P)

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.