Your textbook has analyzed simultaneous equation systems in the case of two equations,
Yi = β0 + β1Xi + ui
Xi = + Yi + vi,
where the first equation might be the labor demand equation (with capital stock and technology being held constant),and the second the labor supply equation (X being the real wage,and the labor market clears).What if you had a a production function as the third equation
Zi = + Yi + wi
where Z is output.If the error terms,u,v,and w,were pairwise uncorrelated,explain why there would be no simultaneous causality bias when estimating the production function using OLS.

Question

Your textbook has analyzed simultaneous equation systems in the case of two equations,
Yi = β0 + β1Xi + ui
Xi =  +  Yi + vi,
where the first equation might be the labor demand equation (with capital stock and technology being held constant),and the second the labor supply equation (X being the real wage,and the labor market clears).What if you had a a production function as the third equation
Zi =  +  Yi + wi
where Z is output.If the error terms,u,v,and w,were pairwise uncorrelated,explain why there would be no simultaneous causality bias when estimating the production function using OLS.

Quizplus · Accepted Answer

The Answer of Your textbook has analyzed simultaneous equation systems in the case of two equations,
Yi = β0 + β1Xi + ui
Xi =  +  Yi + vi,
where the first equation might be the labor demand equation (with capital stock and technology being held constant),and the second the labor supply equation (X being the real wage,and the labor market clears).What if you had a a production function as the third equation
Zi =  +  Yi + wi
where Z is output.If the error terms,u,v,and w,were pairwise uncorrelated,explain why there would be no simultaneous causality bias when estimating the production function using OLS.

Your Textbook Has Analyzed Simultaneous Equation Systems in the Case