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Answer:

a. Since carrot prices and quantities are determined by a system of demand and supply equations, carrot farmers are price-takers and the demand for carrots should be estimated using 2SLS.

b. P and Q are endogenous variables in the system while t and W are exogenous variables. Demand is identified because supply contains an exogenous variable (W) that is not contained in the demand equations.

c. The printout from STATISTIX 7 looks like:

[pic]

The estimated demand for carrots is:

Qd=-1848628-545.782P+938.443t

d. Yes, ḃ and ĉ are statistically significant at 13.57% level or better. The algebraic signs of ḃ and ĉ are as expected. The law of demand requires that ḃ be negative. Since carrots grew more popular with consumers during the period of the sample, ΔQd/Δt should be positive.

e. Carrots demand over the range of prices in the 1983-2000 sample, which does not include any periods of unusually high or low prices, should tend to be price inelastic because:

1) Carrots are relatively inexpensive and so comprise a small fraction of household spending on food;

2) At the relatively low price just mentioned, consumers are not likely to be willing to substitute other vegetables if they wish to eat carrots.

f. Qd=-1848628-545.782X14.432+938.443X1991.5=12,404.51, which is the sample mean value of Q.

Ed=-545.782X14.432/12,407.51=-0.635, So carrots demand is measured at sample mean value of P, Q and t.

g. Carrots price must fall by 15.75%:

[pic] → %ΔP=15.75%

h. Each passing year (Δt=+1) is associated with an increase in carrot demand of 938.4 thousand hundred weight(i.e., an increase of 938,400 hundred weight on average for each year.)