Second z should be uncorrelated with The 2 step Least Squares work as follows

Second z should be uncorrelated with the 2 step least

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9. An economist wants to show that competition decreases prices. He collects data on prices and the numberof active °rms in the market of a homogenous product over a long time period. Then, he considers thefollowing econometric model:pt=°+±nt+"t;whereptis the price of the product att; ntis the number of °rms producing and selling the product att;and"tis the sum of all unobservable factors that a/ect the price level. The economist wants to showthat±is negative and statistically signi°cant.(a) What are possible elements in"t? (b) Do you think the economist will successfully show that competition decreases prices? Explain.
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