Question

Mark as true or false and briefly explain the reason

6. If you have a problem of simultaneous causality, you can address this by making sure that all possible omitted variables are added to your regression as control variables.
7. When you have data on the price and quantity sold of a good, an OLS regression of log quantity on log price will normally give you a consistent estimate of the price elasticity of demand for that good.

Answer 1

6) False, Simultaneity is where the explanatory variable is jointly determined with the dependent variable. In other words, X causes Y but Y also causes X. It is one cause of endogeneity (the other two are omitted variables and measurement error).

Simultaneous casuality or Simultaneity bias is a term for the unexpected results that happen when the explanatory variable is correlated with the regression error term, ε (sometimes called the residual disturbance term), because of simultaneity. It’s so similar to omitted variables bias that the distinction between the two is often very unclear and in fact, both types of bias can be present in the same equation.

The standard way to deal with this type of bias is with instrumental variables regression thats i is a third variable, Z, used in regression analysis when you have endogenous variables—variables that are influenced by other variables in the model. In other words, you use it to account for unexpected behavior between variables. Using an instrumental variable to identify the hidden (unobserved) correlation allows you to see the true correlation between the explanatory variable and response variable, Y.

Hence the given statement is False.

7)TRUE.

The given statement is true because this is an example of double log or log linear functional form which shows percentage change in dependent variable due to percentage change in explainatory variable. In the given statement the OLS regression coefficient will give an estimate of percentage change in quantity demanded due to percentage change in price which is the definition of price elasticity pf demand for that good.