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a) Consider the following simultaneous equation system '0) 3'1: = o + 13%: + alet + a3X2t + H1: (1) 3'2: = 30 + .3135:
a) Consider the following simultaneous equation system '0) 3'1: = \"o + \"13%: + alet + a3X2t + H1: (1) 3'2: = 30 + .3135: + ZXIt + F2: (2) (i) Explain, with reference to these equations, the undesirable consequences that would arise if (equation 1) and (equation 2) were estimated separately using OLS. (4 marks) (ii) State the order condition for determining whether an equation which is part of a system is identied. Use this condition to determine whether above equation (1) or (2) or both or neither are identied. (6 marks) Assuming that the market is always in equilibrium and the correlation between quantity and price can be explained through the following simultaneous equation. Q=a+P+l+u (4) Q=A+mP+kC+v (5) (i) Derive the reduced form equations corresponding to (4) and (5). (10 marks) (ii) Briey explain how can simultaneous equations models (equation (4) and (5) be validly estimated? (Hint: from your answer obtained in b (i))
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