Multiple Choice
In estimating the effect of price on sales (Salesi = α0 + α1Pricei + Ui) , you are attempting to find an instrumental variable that will solve the endogeneity problem caused by the confounding factor of number of competitors being within Ui, which is correlated with price. Which of the following statements would suggest that wholesale costs would satisfy the exogenous condition to be a potential instrument variable?
A) Wholesale costs are uncorrelated with price.
B) Wholesale costs are correlated with price.
C) Wholesale costs are uncorrelated with sales.
D) Wholesale costs are uncorrelated with number of competitors.
Correct Answer:
Verified
Correct Answer:
Verified
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