The Fulton Fish Market has been operating in NYC for over 150 years. Your goal i
ID: 1205714 • Letter: T
Question
The Fulton Fish Market has been operating in NYC for over 150 years. Your goal is to estimate the demand (for fish) for this market using historic data on daily prices and quantities. Your structural demand equation is log(Q_i) - beta_0 + beta_1 log(P_i) + u_i where Q_i = quantity sold on day i, P_i = average daily price. Is P_i endogenous in the demand equation? Explain. Suppose that this is the supply equation: log(Q_i) = alpha_0 + alpha_1 P_i + c_i List at least two factors that can shift the supply curve for fish. That is, think what can be in the error term e_i of the supply equation. Are any of those factors uncorrelated with the error term m, in the demand equation? Explain your point. List some factors that can shift the demand curve for fish. That is, think what can be in the error term of the demand equation.Explanation / Answer
(a) Pi is an endogenous variable because, as price of fish increases (decreases), quantity demanded of fish decreases (increases) following the law of demand.
(b)
(i) Two such factors can be:
- Environmental disruption causing the fish to move away from local water-body to other locality so that supply is adversely affected, and
- A government intervention in the form of a quota on quantity of fishing per day, which restricts its supply.
(ii) These factors will not impact the demand for fish, since demand side factors and supply side factors are not common.
(c) Following factors can shift demand for fish:
- A WHO announcement that fish is detrimental to health, which will switch consumers to consumption of non-fish protein, or
- Lower income level of majority of fish consumers, lowering demand for fish.
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