Problem 2. (SW 12.8.) Consider a product market with a supply function Q₁ = B₁ + B₁P₁ + už, a demand function Q = % +u, and an equilibrium condition Q₁ = Qi, where u and u are mutually independent i.i.d. random variables, both with a mean of 0. (a) Show that P; and uș are correlated. (b) Show that the OLS estimator of ₁ is inconsistent. Hint: The standard strategy for showing inconsistency: first, argue that BLS will converge in large samples to will converge in large samples to Cou(Q), second, use calculations to show that Cov(Q²,P) # B₁. Var Var(P) (c) How would you estimate Bo, B₁, and ?
Problem 2. (SW 12.8.) Consider a product market with a supply function Q₁ = B₁ + B₁P₁ + už, a demand function Q = % +u, and an equilibrium condition Q₁ = Qi, where u and u are mutually independent i.i.d. random variables, both with a mean of 0. (a) Show that P; and uș are correlated. (b) Show that the OLS estimator of ₁ is inconsistent. Hint: The standard strategy for showing inconsistency: first, argue that BLS will converge in large samples to will converge in large samples to Cou(Q), second, use calculations to show that Cov(Q²,P) # B₁. Var Var(P) (c) How would you estimate Bo, B₁, and ?
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
ChapterB: Differential Calculus Techniques In Management
Section: Chapter Questions
Problem 8E
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![Problem 2. (SW 12.8.) Consider a product market with a supply function Q₁ =B₁ + B₁P₁ + už,
a demand function Q 7o+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 P; and us are correlated.
(b) Show that the OLS estimator of 3₁ is inconsistent. Hint: The standard strategy for showing
inconsistency: first, argue that ₁ will Var(P)
converge in large samples to Co(P), second, use
OLS
calculations to show that Cov(Q³,P) # B₁.
Var(P)
(c) How would you estimate Bo, B₁, and %0?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8eeaacd3-f9c7-4223-a8e6-a717e551a98a%2Fdd8381ac-a518-4183-a651-2ddd8e327650%2Fmksoc9i_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 2. (SW 12.8.) Consider a product market with a supply function Q₁ =B₁ + B₁P₁ + už,
a demand function Q 7o+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 P; and us are correlated.
(b) Show that the OLS estimator of 3₁ is inconsistent. Hint: The standard strategy for showing
inconsistency: first, argue that ₁ will Var(P)
converge in large samples to Co(P), second, use
OLS
calculations to show that Cov(Q³,P) # B₁.
Var(P)
(c) How would you estimate Bo, B₁, and %0?
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