Question: 12.8 Consider a product market with a supply function Qsi = b0 + b1Pi + usi , a demand function Qdi = g0 + udi

12.8 Consider a product market with a supply function Qsi

= b0 + b1Pi + usi

, a demand function Qdi

= g0 + udi

, and a market equilibrium condition Qsi

= Qdi

, where usi and udi are mutually independent i.i.d. random variables, both with a mean of zero.

a. Show that Pi and usi are correlated.

b. Show that the OLS estimator of b1 is inconsistent.

c. How would you estimate b0, b1, and g0?

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