Prepare a simultaneous equation model, Financial Econometrics

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Question :

(a) Why OLS cannot be applied in the presence of simultaneous equation bias?

b) i) Prepare a simultaneous equation model for the supply and demand of dentist in Mauritius. Specify the endogenous and exogenous variables variables in the model.

ii) State whether the supply and demand equations form the structural model are just-identified/over-identified/under-identified.

iii) Get the expressions for the reduced form equations for demand and supply functions.

c) Can OLS be applied to the reduced form equations obtained in b) iii)? Justify your answer.

d) Develop a recursive model (three-equations system) and state why OLS can be applied to each equations separately?

e) How do we tell whether variables really need to be treated as endogenous or not?


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