4. Consider a product market with a supply function Q = Po + B₁P; + us, a demand function Qd = = 70 +u, and a market equilibrium condition Q = Qd, where u and u are mutually independent i.i.d. random variables, both with a mean of zero. (a) Show that P; and us are correlated. (b) Show that the OLS estimator of 3₁ is inconsistent. (c) How would you estimate 30, 31, and yo?

A First Course in Probability (10th Edition)
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ISBN:9780134753119
Author:Sheldon Ross
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Chapter1: Combinatorial Analysis
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4. Consider a product market with a supply function Q = Po + B₁P; + us, a demand function
Qd = = 70 +u, and a market equilibrium condition Q = Qd, where u and u are mutually
independent i.i.d. random variables, both with a mean of zero.
(a) Show that P; and us are correlated.
(b) Show that the OLS estimator of 3₁ is inconsistent.
(c) How would you estimate 30, 31, and yo?
Transcribed Image Text:4. Consider a product market with a supply function Q = Po + B₁P; + us, a demand function Qd = = 70 +u, and a market equilibrium condition Q = Qd, where u and u are mutually independent i.i.d. random variables, both with a mean of zero. (a) Show that P; and us are correlated. (b) Show that the OLS estimator of 3₁ is inconsistent. (c) How would you estimate 30, 31, and yo?
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