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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- Spring '08
- Staff
- Economics, Supply And Demand