Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 8

Suppose that annual earnings and alcohol consumption are determined by the SEM

log(earnings) = ?0 + ?1alcohol + ?2educ + u1

alcohol = ?0 + ?1 log(earnings) + ?2educ + ?3 log(price) + u2,

where price is a local price index for alcohol, which includes state and local taxes. Assume that educ and price are exogenous. If ?2, ?2, ?1,? 2, and ? 3 are all different from zero, which equation is identified? How would you estimate that equation?