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 usi are mutually independent i.i.d. random variables, both with a mean of 0.

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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