Consider the economic modelD₁ = α-ßP、 (a,B> 0)St = 0+8Pt-1+ Et (0,8 > 0)StDewhere P is price, D is demand, S is supply and Et is a white noise for thesupply shock.(i) Show price may be modeled as an AR(1) process. That is, of the formP₁ = a +bPt-1 + Etwhere a and b are constants.(ii) Find a conditions that ensures that the random price has a finite mean(iii) When condition (ii) is satisfied, describe how P changes with t.(iv) Find the mean and variance (of price) assuming stationarity.담hp28°C Light rain

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Answered: Consider the economic model D₂ = a-BP…

Consider the economic model D₂ = a-BP (a,B> 0) St = 0+8Pt-1+Et (0,8>0) Dt = St where P is price, D is demand, S is supply and Et is a white noise for the supply shock.

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

Consider the economic model
D₁ = α-ßP、 (a,B> 0)
St = 0+8Pt-1+ Et (0,8 > 0)
St
De
where P is price, D is demand, S is supply and Et is a white noise for the
supply shock.
(i) Show price may be modeled as an AR(1) process. That is, of the form
P₁ = a +bPt-1 + Et
where a and b are constants.
(ii) Find a conditions that ensures that the random price has a finite mean
(iii) When condition (ii) is satisfied, describe how P changes with t.
(iv) Find the mean and variance (of price) assuming stationarity.
담
hp
28°C Light rain

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