Question 1:
Despite being the cornerstone of introductory economics, supply and demand curves are
notoriously difficult to determine. Because prices and quantities are jointly determined by supply
and demand, a regression of quantities on prices might look like a demand curve, like a supply
curve, or like neither. Explain how an instrumental variables regression using cigarette tax rates
(such as the amount of tax per pack of cigarettes) could be used to determine the demand for
cigarettes. As part of your answer, write out the relevant equation(s), and be sure to comment on
the strength or weakness of the first stage of this IV regression. Finally, explain why the elasticity
of this particular demand is relevant for policy makers (you may assume the policy makers are
trying to decrease the amount of smoking).
Question 1 Despite being the cornerstone of introductory ec.pdf
1. Question 1:
Despite being the cornerstone of introductory economics, supply and demand curves are
notoriously difficult to determine. Because prices and quantities are jointly determined by supply
and demand, a regression of quantities on prices might look like a demand curve, like a supply
curve, or like neither. Explain how an instrumental variables regression using cigarette tax rates
(such as the amount of tax per pack of cigarettes) could be used to determine the demand for
cigarettes. As part of your answer, write out the relevant equation(s), and be sure to comment on
the strength or weakness of the first stage of this IV regression. Finally, explain why the elasticity
of this particular demand is relevant for policy makers (you may assume the policy makers are
trying to decrease the amount of smoking)
