In estimating the causal relationship between Sales and Price in the following determining function Sales_i = β₀ + β₁Price_i + U_i, what assumption in addition to E [U_i ] = 0, justifies that the estimated coefficient on Price can be interpreted as an estimate of the causal effect of Price on Sales? A) E [Price_iU_i] = 0 B) E [Sales_iU_i] = 0 C) E [Price_iU_i ] = β₀ D) E [Price_iU_i ] = β₁

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Quizplus · Accepted Answer

The assumption that E[Price_iU_i] = 0 is required for the estimated coefficient on Price to represent the causal effect of Price on Sales. This assumption states that the error term (U_i) is uncorrelated with the price variable after controlling for the other variables in the model. This is necessary to ensure that the estimated coefficient on Price reflects only the effect of Price on Sales and not any other factors that may be correlated with both Price and Sales. Choices B, C, and D are not relevant to this assumption.

In Estimating the Causal Relationship Between Sales and Price in the Following