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example_last - ECON 103 Review session Maria Casanova March...

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ECON 103, Review session Maria Casanova March 11th (version 0) Maria Casanova Review
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1. Example Example: Cigarette demand Suppose we want to estimate the price elasticity of the demand for cigarettes. We have panel data on annual cigarette consumption and average prices paid in each of the 48 continental US states from 1985 to 1995. Our first idea may be to estimate the following model by OLS: ln ( Q i ) = β 0 + β 1 ln ( P i ) + ε i (1) However, because price and quantity are determined simultaneously as a result of the interaction between supply and demand, ln ( P i ) is likely to be correlated with ε i . Maria Casanova Review
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1. Example Figure: Price and quantity are determined by the interaction of supply and demand 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Quantity Price S 1 D 1 Maria Casanova Review
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1. Example Figure: Price and quantity are determined by the interaction of supply and demand 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Quantity Price S 1 D 2 S 2 D 1 Maria Casanova Review
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1. Example Figure:
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