Example 192

Demand function: Qt = a0 + a1Pt + a2It + u1t (19.2.12)

In this model Q and Pare endogenous and I is exogenous. Applying the order condition given in (19.3.1), we see that the demand function is unidentified. On the other hand, the supply function is just identified because it excludes exactly M — 1 = 1 variable It.

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