Answer to Question #76754 in Macroeconomics for ibrar ahmed
When estimating a demand function, explain why fitting a line of best fit through observed price and quantity combinations over time is not likely to yield good estimates.
fitting a line of best fit through observed price and quantity combinations over time is not likely to yield good estimates because, according to Schroeter (1988), plotting the supply and demand curves involves change in prices of products. The line of best fit comes in between the demand and supply curves. When we come to concluding for the DD’ curve, there are chances that the price elasticity of demand for a product in several years would be overestimated or underestimated. For example, decrease in price would lead to increase quantity demanded per year. Therefore such price reduction would result in an increase of the quantity demanded in the units per year. This is a mammoth error in anyone’s book (Schroeter, 1988) Reference Schroeter, J. R. (1988). Estimating the degree of market power in the beef packing industry. The Review of Economics and Statistics, 158-162.