Your Textbook Gives the Following Example of Simultaneous Causality Bias $y _ { 0 }$

question 9

Essay

Your textbook gives the following example of simultaneous causality bias of a two equation system:
Y_i = β₀ + β₁X_i + u_i
X_i = $y _ { 0 }$ + $y _ { 1 }$ Y_i + v_i
In microeconomics, you studied the demand and supply of goods in a single market. Let the demand ( $Q _ { i } ^ { D }$ )and supply ( $Q _ { i } ^ { S }$ )for the i-th good be determined as follows, $Q _ { i } ^ { D }$ = β₀ - β₁P_i + u_i, $Q _ { i } ^ { S }$ = $y _ { 0 }$ - $y _ { 1 }$ P_i + v_i,
where P is the price of the good. In addition, you typically assume that the market clears.
Explain how the simultaneous causality bias applies in this situation. The textbook explained a positive correlation between X_i and u_i for $y _ { 1 }$ > 0 through an argument that started from "imagine that u_i is negative." Repeat this exercise here.

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Definitions:

Manufacturer

A company or person that makes goods for sale, especially on a large scale involving complex processes.

Factory Overhead

The indirect costs associated with manufacturing, including but not limited to utilities, maintenance, and management salaries.

Product Cost

The total expense incurred to produce a product, including the costs of raw materials, labor, and overhead.

Machine Operators

Workers responsible for setting up, operating, and maintaining machines or equipment in a manufacturing or production facility.