Answer 3ΒΆ
Find the price elasticity of demand for a product
Inference
Why? You are NOT predicting quantity demanded for a product at a given price. You are estimating the impact of an increase in the price on quantity demanded, all other things being equal. Ideally, you want to observe quantity demanded in two counterfactual worlds: world one where the price is \(p\) and the world where the price is \(p'\), but everything else is exactly the same. The main problem with inferring the price elasticity of demand for a product from observational data is that quantity and price are equilibrium concepts. For example, when demand increases (e.g., there is economic growth), it leads to a simultaneous increase in the price and the quantity demanded. Does it mean that demand is upward sloping? No. That is why there are complicated methods in econometrics on how to estimate price elasticity of demand by distinguishing from demand shocks and supply shocks.