7.

19
a) Model (5) tends to be the best because it consists all the economically relevant
variables, including the composite real price of chicken substitutes which should help
reduce the multicollinearity between price of beef and price of pork in model (4).
Model (1), (2),(3) has limited or no substitute good information.
b) The coefficient of ln X2 represents income elasticity
The coefficient of ln X3 represents chicken-price elasticity
c) Model (2), only pork as a substitute good
Model (4), both pork and beef are substitute good
d) There maybe a problem of multicollinearity between the price of beef and pork
e) Yes. Because it reduce the problem of multicollinearity
f) They are substitute goods because they compete with chicken as a substitute food.

. reg lnY lnX2 lnX3 lnX6

Source | SS df MS Number of obs = 23

-------------+---------------------------------- F(3, 19) = 315.21
Model | .759492623 3 .253164208 Prob > F = 0.0000
Residual | .015260227 19 .00080317 R-squared = 0.9803
-------------+---------------------------------- Adj R-squared = 0.9772
Total | .77475285 22 .035216039 Root MSE = .02834

------------------------------------------------------------------------------
lnY | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
lnX2 | .4812863 .0681877 7.06 0.000 .3385677 .6240048
lnX3 | -.3506279 .0793939 -4.42 0.000 -.5168011 -.1844546
lnX6 | -.0610352 .1299602 -0.47 0.644 -.3330449 .2109745
_cons | 2.029865 .1186821 17.10 0.000 1.781461 2.278269
------------------------------------------------------------------------------
g) The regression of model 5:
ln Yt= 2.030 + 0.481lnX2t -0.351lnX3t -0.061lnX6t
(0.119) (0.068) (0.079) (0.130)

R2=0.9803
R2 (adj)=0.9772
Modified R2= (1-k/n)R2=0.8295
The income elasticity and own-price elasticity have the correct sign
h) The consequence of estimating model (2) woyld be that estimators are likely to be
biased due to model specification.
10.28

a)There are 5 independent variables, there will be five auxiliary regression

Dependent variable R-square
X2 0.9846
X3 0.9482
X4 0.9872
X5 0.9889
X6 0.9927

b) Because R-square value in all auxiliary regressions are significantlt high, the data
suffer from the multicollinearity problem
c) There are too many substitute good variables in equation. We drop X4 X5 out of
model to reduce the risk of collinearity problem.
d) Creating a relative prive variable, say the price of beef divided by the price of pork.