Problem 1:

The demand for roses was estimated using quarterly figures for the period 1971 (3rd quarter) to
1975 (2nd quarter). Two models were estimated and the following results were obtained:
Y = Quantity of roses sold (dozens)
X2 = Average wholesale price of roses ($ per dozen)
X3 = Average wholesale price of carnations ($ per dozen)
X4 = Average weekly family disposable income ($ per week)
X5 = Time (1971.3 = 1 and 1975.2 = 16)
ln = natural logarithm
The standard errors are given in parentheses.
A. ln Yt = 0.627 - 1.273 ln X2t + 0.937 ln X3t + 1.713 ln X4t - 0.182 ln X5t
(0.327) (0.659) (1.201) (0.128)
R2 = 77.8% D.W. = 1.78 N = 16
B. ln Yt = 10.462 - 1.39 ln X2t
(0.307)
R = 59.5%
2
D.W. = 1.495 N = 16
Correlation matrix:

ln X2 ln X3 ln X4 ln X5
ln X2 1.0000 -.7219 .316 -.7792
0
ln X3 -.7219 1.0000 -.1716 .5521
ln X4 .3160 -.1716 1.0000 -.6765
ln X5 -.7792 .5521 -.6765 1.0000

a) How would you interpret the coefficients of ln X2, ln X3 and ln X4 in model A?

What sign would you expect these coefficients to have? Do the results concur with your
expectation?

= -1.273: If other variables fixed, when average wholesale price of roses increase
1%, the average quantity of roses sold will decrease 1.273%
= 0.973: If other variables fixed, when average wholesale price of carnations
increase 1%, the average quantity of roses sold will increase 0.973%
= 1.713: If other variables fixed, when average weekly family disposable income
increase 1%, the average quantity of roses sold will increase 1.713%
= -0.182: If other variables fixed, when time increase 1%, the average quantity of
roses sold will decrease 0.182%
- Predict: β2 < 0, β3 > 0, β4 > 0, β5 < 0
 The results concur with my expectation
b) Are these coefficients statistically significant?
 a.

We have F > F0.05(4,11) = 3.3567 so we reject H0 and conclude that the model is
significant
c) Use the results of Model A to test the following hypotheses:
i) The demand for roses is price elastic

{
H 0 : β 2=−1
H 1: β 2 ←1

^
β 2−(−1) −1.273+ 1
t= = =−0.83> - t 11
0.05 =−1.796
^
Se ( β 2) 0.327
 We can’t reject H0 and conclude that the demand for roses is not price elastic

ii) Carnations are substitute goods for roses

{ H 0 : β 3=0
H 1: β 3 >0
^
β3 0.937
t= = =1.42 < t 11
0.05 =1.796
^
Se ( β ) 0. 659
3
 We can’t reject H0 and conclude that carnations are not substitute goods for
roses.
iii) Roses are a luxury good (demand increases more than proportionally as income rises)

^
β 4−(1) 1.713−1
t= = =0.59 < t 11
0.05=1.796
^
Se ( β 4 ) 1.201
 We can’t reject H0 and conclude that roses are not luxury goods
iv) roses are normal goods

{ H 0 : β 4 =0
H 1: β 4 > 0
^
β4 1.713
t= = =1.42< t 11
0.05=1.796
^
Se ( β 4 ) 1.201
 We can’t reject H0 and conclude that roses are not normal goods.
d) Are the results of (b) and (c) in accordance with your expectations? If any of the tests are
statistically insignificant, give a suggestion as to what may be the reason.
e) Do you detect the presence of multicollinearity in the data? Explain.
The model have some signal of multicollinearity. This is due to 2 main reasons. Firstly,
R^2=77.8% but only Beta2 is significant. Secondly, as the result from Correlation matrix,
correlation bw lnX2 vs lnX3, lnX2 vs lnX5 is relatively high.
f) Do you detect the presence of serial correlation? Explain
g) Do the variables X3, X4 and X5 contribute significantly to the analysis? Test the joint
significance of these variables.

We have:
We have F < F0.05(3,11) = 3.58 so we don’t reject H0 and conclude that these three
variables are not significant

h) Starting from model B, assuming that at the time point of January, 1973, there was a disaster
that heavily affected the quantity of roses produced. Suggest a model to check if we have to use
two different models for the data before and after the disaster. (Using dummy variable).
B. ln Yt = 10.462 - 1.39 ln X2t
I suggest to add 1 dummy variable Time (T) in order to test the effect of disaster on the quantity
of roses produced.
D =1 if the time after the disaster
D =0 if the time before the disaster
Problem 2:
Two large US corporations, General Electric and Westinghouse, compete with each other and
produce many similar products. In order to investigate whether they have similar investment
strategies, we estimate the following model using pooled time series data for the period 1935
to 1954 for the two firms:

INVt = 1 + 2 DVt + 3 Vt + 4 DV*Vt + 5Kt + 6 DV*Kt + ut (1)

where INV = gross investment in plant and equipment

V = value of the firm = value of common and preferred stock
K = stock of capital
DV = 0 if General Electric (observations 1 to 20)
= 1 if Westinghouse (observations 21 to 40)
All three continuous variables are measured in millions of 1947 dollars. Pooling the data
yields 40 observations with which to estimate the parameters of the investment function.
However, pooling is valid only if the regression parameters are the same for both firms. In
order to test this hypothesis, intercept and slope dummy variables are included in the model.

Dependent Variable: INV

Method: Least Squares

Sample: 1 40
Included observations: 40
Variable Coefficient Std. Error t-Statistic Prob.
 C -9.956306 23.62636 -0.421407 0.6761
DV 9.446916 28.80535 0.327957 0.7450
V 0.026551 0.011722 2.265064 0.0300
DV*V 0.026343 0.034353 0.766838 0.4485
K 0.151694 0.019356 7.836865 0.0000
DV*K -0.059287 0.116946 -0.506962 0.6155
R-squared 0.827840 Mean dependent 72.59075
var
Adjusted R-squared 0.802523 S.D. dependent var 47.24981
S.E. of regression 20.99707 Akaike info 9.064124
criterion
Sum squared resid 14989.82 Schwarz criterion 9.317456
Log likelihood -175.2825 F-statistic 32.69818
Durbin-Watson stat 1.121571 Prob(F-statistic) 0.000000

(a) Interpret all the coefficient estimates, stating whether the signs are as you would
expect, and comment on the statistical significance of the individual coefficients.

{ INV ( ¿ ) =β 1+ β3 ×V + β 5 × K
INV ( WH )=β 1+ β 2 + ( β 3 + β 4 ) ×V + ( β5 + β 6 ) × K

Meaning Expected sign

β2 The difference between INV of GE and WH if Positive
other independent variables fixed
β3 For GE, if V increases 1 million (K fix), average of Positive
INV will increase β 3 million
β4 The difference between rate of change of INV by V Positive
(K fix) between GE and WH
β5 For GE, if K increases 1 million (V fix), average of Positive
INV will increase β 5 million
β6 The difference between rate of change of INV by K Positive
(V fix) between GE and WH

{ H 0 : β 2=0
H 1 : β2 ≠ 0
P-value =0.745 >0.05 so we can’t reject H0 and conclude that β 2 is not significant at level
of 5%.
TT: β 3 , β 5 :sig , β 4 , β 6 :insig
(b) Comment on the overall fit and statistical significance of the model. => R^2= 0.82
 How is goodness of fit based on R^2, state meaning of R^2
Test for the sig of model using F-test or p-value
R^2=0.82 means 82% of variation of INV is explained by the model

{ H 0 : β 2=β 3=β 4=β 5=β 6=0

H 1:not H 0
F=32.69818 with p-value =0.00 <0.05 so the model is stastitically significant at level of 5%
(c) The Jarque-Bera statistic is 7.77 and its p-value is 0.02. What can you conclude
about the distribution of the disturbance term? Why is this test important?

{HH1 :0Error
: Error terms are normal distribution
terms are not normal distribution

The Jarque-Bera statistic is 7.77 with p-value is 0.02 < 0.05

 We can reject H0 and conclude that error terms are not normal distribution.
Why is this test important?
This test is important because there is an assumption that ui has normal distribution, N ( 0 , σ 2 ) .
If this assumption is not valid, we will have the problem of abnormal distribution. Hence, we
can’t conduct test for the model.
(d) On the basis of the above results, is pooling the data from the two firms
appropriate? Explain.
 Test B2, B4, B6=0 => F-test dropping
In this case, we dont have the information for F-test, we only use t-test for sig for each
coefficient above.
If at least 1 co is sig => cant pool the data of 2 companies

{ H 0 : β 2=β 4 =β 6=0
not H 0
As the results above, β 2 , β 4 , β 6 is insignificant so we can’t reject H0 and conclude that the
data from 2 firms can pool.
(e) An alternative way of testing whether pooling the data is appropriate, without using
dummy variables, is to use the Chow breakpoint test. Referring to table below, briefly
discuss how the test works and whether the results are consistent with the earlier model
(which includes dummy variables).

Chow Breakpoint Test: 21

F-statistic 1.189433 Probability 0.328351
Log likelihood ratio 3.992003 Probability 0.262329

(f) Explain the results and implications of the following Ramsey RESET test. (Note that the
dummy variables have been omitted from the original model).

Ramsey RESET Test:

F-statistic 0.000200 Probability 0.988806
Log likelihood ratio 0.000219 Probability 0.988189

Test Equation:
Dependent Variable: INV
Method: Least Squares
Date: 05/15/02 Time: 13:07
Sample: 1 40
 Included observations: 40
Variable Coefficien Std. Error t-Statistic Prob.
t
C 17.81458 8.199161 2.172732 0.0365
V 0.015226 0.006706 2.270632 0.0293
K 0.144467 0.065596 2.202383 0.0341
FITTED^2 -2.87E-05 0.002028 -0.014128 0.9888
R-squared 0.809773 Mean dependent var 72.59075
Adjusted R-squared 0.793921 S.D. dependent var 47.24981
S.E. of regression 21.44950 Akaike info criterion 9.063919
Sum squared resid 16562.91 Schwarz criterion 9.232807
Log likelihood -177.2784 F-statistic 51.08255
Durbin-Watson stat 1.106556 Prob(F-statistic) 0.000000
F = 0.0002 with p-value – 0.988 we don’t reject H0 and conclude that there is no
ommitted variables in the model.
Note: We can have similar questions using results from eviews to check for autocorrelation and
heteroscedasticity (Breusch Godfrey test and White test).

Problem 4: From the data for 46 states in the US for 1992, Baltagi obtained the following regression results:

LogC(hat)= 4.3 – 1.34 log(P) + 0.17 log(Y)

se (0.91) (0.32) (0.2) Adjusted R2=0.27

where C is Cigarette consumption (packs per year) P is real price per pack and Y is real disposable income per capital

1. Interprete the meaning of each estimated coefficients

2. Are the signs of coefficients of your expectation
3. How much P and Y explain for the variation in C
4. What is the elasticity of demand for cigarette w.r.t. price? Is it statistically significant? If so, is it
statistically different from 1?
5. What is the income elasticity of demand for cigarette? is it statistically significant? If not, what
might be the reasons for that?
6. Test for overall significance of the model