(Bonus) Problem 6 An analyst believes the quantity demanded for Starbucks coffee (Qd) is a linear function of its price

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Bonus Problem 6 An Analyst Believes The Quantity Demanded For Starbucks Coffee Qd Is A Linear Function Of Its Price 1 (136.07 KiB) Viewed 23 times

(Bonus) Problem 6 An analyst believes the quantity demanded for Starbucks coffee (Qd) is a linear function of its price (P): Qd = Bo + B1P+u (2) At the same time, another clever analyst tells you this regression won't allow you to recover the causal effect of prices on quantity demanded (B1) because prices are also a function of quantity demanded. The analyst also tells you that Starbucks marginal costs of producing coffee (MC) affects the price it charges independently of quantity demanded: a P= do + aiQa + a2MC +€ d (3) i. How can you use information from the equation (1) and (2) to identify the causal effect of prices on quantity demanded (B1)? Be precise. ii. Given your answer in (i), you are able to identify B1 given data on quantity demanded Qd, prices P and Starbucks' marginal costs MC. Can you use quantity purchased as a proxy for quantity demanded? Why or why not?