CONSULTING PROJECT
Estimating Industry Demand for Fresh Market Carrots
The market for carrots is comprised of two segments: fresh market carrots, which have excellent, uniform color and a small core, and processing carrots, which are larger than fresh market carrots but still have good flavor, color, and sweetness. Annual data for the years 1983–2000 in the fresh market segment of the carrot industry are presented below. Q is total annual fresh market carrot production (measured in thousands of hundred weight units, which are 100,000 pound units), P is average annual real price per hundred weight of fresh market carrots (in constant 1991 dollars),1 and W is a weather index based on temperature and rainfall (W varies directly with conduciveness of weather for growing carrots). To account for the increasing popularity of carrots during the sample period, the time variable t is added to the demand equation to reflect growing popularity of carrots. The production data do not account for imports and exports of carrots. During the period of this sample, however, net exports of carrots (exports minus imports) were quite small in every year.
t 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Q 7,242 8,220 8,886 9,300 9,593 10,758 10,356 11,322 11,741 12,486 13,927 15,072 14,969 14,163 15,589 16,192 15,479 17,992 P 10.03 6.62 10.47 12.59 11.54 10.56 13.88 14.01 14.71 13.15 13.16 16.14 18.06 19.45 19.65 17.29 19.22 19.24 W 100.0 108.3 109.5 96.3 98.3 101.2 101.5 100.6 111.8 109.0 112.3 115.4 107.2 90.5 92.5 95.6 94.8 98.7
Consider the following specification of empirical demand and supply functions in the fresh market segment of the carrot industry:2 Qd = a + bP + ct
Qs = d + eP + f W
a. b.
Should the ordinary least-squares (OLS) method or the two-stage least-squares method (2SLS) method be employed to estimate market demand for carrots? Explain briefly. Which variables are endogenous variables in the system? Which...