Scenario: Imagine that you've been hired by an economic consulting fim to study the market for bananas. Your goal is to calculate the clasticity of demand and the clasticity of supply for the banana market in New York City. You have monthly data on banana prices (p) and quantities (9.). You have also found data on the number of hurricanes (he) that have hit banana producing countries during a given month. Xe is a variable that influences both supply and demand. So, your structural model takes the form: In () = Yo + Yi In (p.) + Yah + Y3X + 8 (supply curve) In (9) = 80 +8, In (Pd) + 82%+ + My demand curve) 9. Refer to the above scenario. Describe why pe is correlated with both , and dr. Use economic reasoning (see Principles of Micro). Notice that because pe is correlated with #, and it, we can't get unbiased estimates for either of the two equations using ordinary least squares. 10. Refer to the above scenario. We can write down reduced form equations for In (@:) and in (ps): In (q) = 119 +11 he + T12X+ + ! In (Pe) = 10 + 2h + 12x: + where then and 2 parameters are duced-form parameters that are functions of the structural parameters. Write down the reduced form parameters in terms of the structural parameters. For example, 2. Yo-80 (see below for some help on the easiest way to do this) 8,- Scenario: Imagine that you've been hired by an economic consulting fim to study the market for bananas. Your goal is to calculate the clasticity of demand and the clasticity of supply for the banana market in New York City. You have monthly data on banana prices (p) and quantities (9.). You have also found data on the number of hurricanes (he) that have hit banana producing countries during a given month. Xe is a variable that influences both supply and demand. So, your structural model takes the form: In () = Yo + Yi In (p.) + Yah + Y3X + 8 (supply curve) In (9) = 80 +8, In (Pd) + 82%+ + My demand curve) 9. Refer to the above scenario. Describe why pe is correlated with both , and dr. Use economic reasoning (see Principles of Micro). Notice that because pe is correlated with #, and it, we can't get unbiased estimates for either of the two equations using ordinary least squares. 10. Refer to the above scenario. We can write down reduced form equations for In (@:) and in (ps): In (q) = 119 +11 he + T12X+ + ! In (Pe) = 10 + 2h + 12x: + where then and 2 parameters are duced-form parameters that are functions of the structural parameters. Write down the reduced form parameters in terms of the structural parameters. For example, 2. Yo-80 (see below for some help on the easiest way to do this) 8
