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ALC, Inc., has, in recent years, opened large markets of new customers, experienced strong competition from...

ALC, Inc., has, in recent years, opened large markets of new customers, experienced strong competition from substitutes, and survived a nasty national recession. When the chief economist statistically estimated the company's product demand using data from the past five years, she found a statistically significant positive (direct) relationship between price and quantity. What according to you led to this finding?

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Answer #1

The chief economist's estimates suffer from a classic identification problem. Instead of estimating a stable demand curve where prices change because of supply shifts, this economist has failed to control for shifts in the demand curve due to changes in the number of customers, changes in the intensity of competition, and changes in income

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