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)

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)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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