In Determining the Causal Effect of Price on Sales, If

question 34

Multiple Choice

In determining the causal effect of Price on Sales, if advertising spend is a good control variable, how will the correlation of the error terms from the regression, Sales_i = β₀ + β₁Price_i + U_i, and Sales_i = α₀ + α₁Price_i + α₂Advertising_i + V_i and price be related?

• A) Cor(U_i, V_i) = 0
• B) Cor(U_i, Price_i) = 0, Cor(Price_i, V_i) = 0
• C) Cor(U_i, Price_i) ≠ 0, Cor(Price_i, V_i) = 0
• D) Cor(U_i, Price_i) = 0, Cor(Price_i, V_i) ≠ 0

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Definitions:

Isoelastic Curve

An isoelastic curve represents a locus where the elasticity of a variable, such as demand or utility, is constant.

Market Demand

The total demand for a product or service within a given market, representing the aggregate of individual demands.

Aggregation Examples

Instances of combining multiple items, data, or variables into a single set or summary.

Elastic Demand

A situation in which the demand for a good or service is sensitive to price changes, characterized by the percentage change in demand being greater than the percentage change in price.