Suppose You Are Estimating Demand Relationships, Where You Are Attempting

question 49

Multiple Choice

Suppose you are estimating demand relationships, where you are attempting to identify the effect of price on quantity sold (i.e., Q_i = α₀ + α₁Price_i + U_i) . It will often be the case that the use of an instrumental variable for price will likely yield a coefficient (for α₁) that relates to the use of multiple regression in what way?

• A) Is lower, because price and U_i are likely positively correlated.
• B) Is lower, because price and U_i are likely negatively correlated.
• C) Is higher, because price and U_i are likely negatively correlated.
• D) Is higher, because price and U_i are likely positively correlated.

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