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 aremutually 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 showinginconsistency: first, argue that ₁ will Var(P)converge in large samples to Co(P), second, useOLScalculations to show that Cov(Q³,P) # B₁.Var(P)(c) How would you estimate Bo, B₁, and %0?

Given information Qd=γ0+μdiQs=β0+β1+Pi+μsi

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 ?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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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