9 2. (A) Conaider a product inarket with a supply function Qui b0 +bIPi+ usi, and a demand function Qdi - 0 + blPi + udi, and a market equilibnum condition Qsi-Qdi, wbere usi and udi are mutually independent i.i.d. random variables, both with a mean of zero. a. Show that Pi and udi are correlated. b. Show that the OLS estimator of bl is inconsistent. c. How would you estimate b0, b1, and g0?

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Q 2. (A) Consider a product inarket with a supply funetion
Qui- b0 + bIPi+ usi,
and a demand function
Qdi- g0 + b1Pi + udi, and a market equilibnum condition Qsi = Qdi, wbere usi and udi
are mutually independent i.i.d. random variables, both with a mean of zero.
a. Show that Pi and udi are correlated.
b. Show that the OLS estimator of bl is inconsistent.
c. How would you estimate b0, bl, and g0?
Transcribed Image Text:Q 2. (A) Consider a product inarket with a supply funetion Qui- b0 + bIPi+ usi, and a demand function Qdi- g0 + b1Pi + udi, and a market equilibnum condition Qsi = Qdi, wbere usi and udi are mutually independent i.i.d. random variables, both with a mean of zero. a. Show that Pi and udi are correlated. b. Show that the OLS estimator of bl is inconsistent. c. How would you estimate b0, bl, and g0?
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