TABLE 11.6 Estimates for Exercise 11.10 (3) (2) 0.4460 (4.1596) с 5.6169 (3.6256) -0.2762 (0.1097) 0.8685 (0.1434) PF 19.9625 (1.2371) -1.0425 (0.0907) -40.5043 (10.0873) 2.1635 (0.3053) 2.4522 (0.3991) PS 1.1815 (0.2765) -0.1277 (0.0671) P 0.3542 (0.0288) Standard errors in parentheses. a. Are the demand and supply equations identified using the necessary condition in Section 11.4? Explain. b. Column (1) contains the OLS estimates of the reduced-form equation for Q, and column (2) con- tains the OLS estimates of the reduced-form equation for P. Compute the first-stage F-test used to decide upon instrument strength for each equation. Is the F-value greater than the rule of thumb threshold, F > 10? (Hint: Recall the relationship between t- and F-tests.] c. Using the estimates accurately sketch the supply and demand equations, with Q on the vertical axis and P on the horizontal axis . For these sketches set the values of the exogenous variables, PS and PF, to be PF" = 23 and PS* = 22. d. What are the equilibrium values of P and Q from (c)? e. On the graph from part (c) show the consequences of increasing the price of the factor of pro- duction (the truffle-seeking pig's rental rate) from PF* = 23 to PF = 30, holding the value of PS constant. =
f. Calculate the change in equilibrium price P and quantity Q in (d). What is the percentage change in equilibrium quantity divided by the percentage change in PF? g. Calculate a 95% interval estimate for the elasticity of Q with respect to PF using the reduced-form equation estimates, at PF = 23 and Ps* = 22. Is the elasticity in (f) within the 95% interval * estimate? 1.
2 A Necessary Condition for Identification In a system of M simultaneous equations, which jointly determine the values of M endoge- nous variables, at least M - 1 variables must be absent from an equation for estimation of its parameters to be possible. When estimation of an equation's parameters is possible, then the equation is said to be identified, and its parameters can be estimated consistently. If fewer than M - 1 variables are omitted from an equation, then it is said to be unidentified, and its parameters cannot be consistently estimated.
Join a community of subject matter experts. Register for FREE to view solutions, replies, and use search function. Request answer by replying!