Consider the following two equations, simultaneous model for the agricultural la
ID: 3173998 • Letter: C
Question
Consider the following two equations, simultaneous model for the agricultural labor market in the United States. In(L) = beta_0 + beta_1 ln (W) ln(Land) + beta_2 ln(Land) + beta_3ln(RE) + beta_4 ln(Othexp)_ + beta_5 ln(Sch) + u_1 In (w) = alpha_0 + alpha_1 ln(L) + alpha_2 ln(Sch) + alpha_3 ln(Othexp) + u_z L = labor (total person days of farm labor by state); W = wage (annual average composite farm wage per hour); RE = research and extension service expenditures (a proxy for innovations); Othexp = current non-labor operating expenses; Sch = median years of formal schooling of rural males; and othwag = alternative wage (weighted average) for craftsmen, foremen, etc. Equation (1) is a demand curve, and equation (2) is a supply curve. Which variables are exogenous? Endogenous? Solve analytically for the two reduced form equations. Identify the simultaneous equations model. Which method would you use to estimate the identified equations? Why?Explanation / Answer
Variables which are Exogenous:
RE: research and extension service expenditures
OtherExp: current non-labor operating expenses
Sch: median years of formal schooling of rural males
othwag: alternative wage
Variables which are endogenous:
L: Labor
W: wage