demand and supply shock, respectively. The equilibrium price and quantity traded are determined in this model. ( °; ±; ²; ³; ´; µ ) is the set of parameters in the model. (a) What can we expect about signs of ( ±; ²; ´; µ )? (b) One analyst wanted to estimate ±: He collected data on the quantity traded and the price in this market for many years; f Q t ; P t g T t =1 : Then he ran OLS, regressing Q t on constant, P t , and X t . Then, he obtained the positive estimate for ± ! Explain possible reasons of why this happened. (c) How would you estimate ± ? Clearly state a set of conditions that should hold for your estimation strategy to work. 7. Consider an industry where two °rms are producing di/erentiated products. Demands are given by 8. Consider a model
9. An economist wants to show that competition decreases prices. He collects data on prices and the number of active °rms in the market of a homogenous product over a long time period. Then, he considers the following econometric model: p t = ° + ±n t + " t ; where p t is the price of the product at t; n t is the number of °rms producing and selling the product at t; and " t is the sum of all unobservable factors that a/ect the price level. The economist wants to show that ± is negative and statistically signi°cant. (a) What are possible elements in " t ?
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