Q, real per capita consumption of wine, S, index of storage costs, Pw, price of wine relative to CPI, Pb, price of beer relative to CPI, A,

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Topics covered in this lab:

• simultaneous equation models

•

simultaneity bias

• 2SLS

Data Description

Data wine.txt contains data on wine industry in Australia. It has six variables, with the descriptions in order as follows: Q, real per capita consumption of wine, S, index of storage costs, Pw, price of wine relative to CPI, Pb, price of beer relative to CPI, A, real per capita advertising expenditure, Y, real per capita disposable income.

Tasks

1. Read in the data from the external text file and carry out logarithm transformations.

2. The demand function for wine is Q = a + a1Pw + a2Pb + aз Y + a4A + u, and the supply function for wine is Q = bo+b1Pw+b2S+ v, where all variables are in logarithm forms. Identify the endogenous and exogenous variables. Determine the identification of each equation by the order condition.

3. Estimate the demand and supply by OLS and observe simultaneity bias. Submit the results.

4. Estimate the model by IV. For the supply function, try using Pb, A, Y separately as IV and using all of them as IV. Submit the results.

5. Estimate the model by 2SLS. Print out the first stage estimates as well. Test the overidentification restrictions for the supply function. Submit the results.

Exercise

1. Test for endogeneity of Pw in the system.

Attachments:

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