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Demand and supply for a product is expressed as

Qd = ßo + ß1P + ß2Y + U
Qs = αo + α1P + α2W + V

Where, Q is the quantity, P is the price, Y is income, and W is the average wage in the industry.

a. Given that in the market P and quantity depend on each other, a two-way causality, the E(PU) ≠ 0 and E(PV) ≠ 0. What is the implication of the two-way causality to the estimated coefficients of the system of equations above?

b. How could you find a consistent eatimate of the coefficient?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M938810

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