The Fulton Fish Market has been operating in NYC for over 150 years. Your goal i

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 historie data on daily priees and quantities. Your structural demand equation is log(Q_i) beta_o + beta_1 log(P_i) + u_i; where Q_i = quantity sold on day i, P_i = average daily price. (a) Is Pi endogenous in the demand equation? Explain. (b) Suppose that this is the supply equation: log(Q_i) = alpha_0 + alpha_1 + P_i + e_i (i) List at least two factors that can shift the supply curvc for fish. That is, think what can be in the error term u_i of the supply equation. (ii) Are any of those factors uncorrelated with the error term m, in t he demand equation? Explain your point. (c) List some factors that can shift the demand curve for fish. That is, think what can be in the error term U; of the demand equation.

Explanation / Answer

a) Yes, P is endogeneous in the demand equation since it is derived from within the system (within the market)

b.i) Two factors that can effect the supply of fish, apart from price can be change in number of sellers and improvement in techonology. Both these factors are independent of price and effect the supply, and will be captured by the error term.

b.ii) Ideally, there should not be any correlation between the terms that are included in the error term. To find out if there is a correlation, a test for heteroscedasticity needs to done, and answer will be based on the results of that test.

c) Demand is also affected by Tastes, Incomes and No of buyers of the consumers, all having a positive impact on the demand . These factors are independent of price and can be included in the error term of the equation.

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