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The data set contains observations for 113 retail outlets. For each retailer, you are given the number of sales for a particular product, the price charged, and the average wage at the overseas manufacturing plant that supplies each outlet.

1. Suppose we want to estimate the effect of price on sales using this dataset.

Assume that price is endogenous. Explain, using economic intuition, why wage may fulfill the requirements of being a good instrument for price.

2. Run the first stage regression and test for the relevance of the instrumental variable, wage. Report the t statistic, accurate to 4 decimal places.

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