Your Textbook Gives the Following Example of Simultaneous Causality Bias

question 38

Essay

Your textbook gives the following example of simultaneous causality bias of a two equation system:
Yi = β0 + β1Xi + ui
Xi = + Yi + vi
In microeconomics,you studied the demand and supply of goods in a single market.Let the demand ( )and supply ( )for the i-th good be determined as follows, = β0 - β1Pi + ui, = - Pi + vi,
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 Xi and ui for > 0 through an argument that started from "imagine that ui is negative." Repeat this exercise here.

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