8/7/2019 classof1econometricsregressionanalysis13-090720062007-phpapp01

1/3

Sub: Economics Topic: Econometrics

www.classof1.com

The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting the sa

lieu of your academic submissions for grades.

ClassOf1provides exert guidance for College, Graduate and High s choolhomeworkand liveonlinetutoring on subjects like

Finance,Marketing,Statistics,Economicsand others. Check out more solved problems in ourSolution Library.

Question:

Two Stage Least Squares Estimates of the Demand for Cigarettes Using Panel Data for 48 U.S.

States

Regressor (1) (2) (3)

In (P cigarettes l, 1995) --- In (P cigarettes l, 1985) -0.94**

(0.21)

-1.34**

(0.23)

-1.20**

(0.20)

In(Incl, 1995) -- In (Inc l, 1985) 0.53

(0.34)

0.43

(0.30)

0.46

(0.31)

Intercept -0.12

(0.07)

-0.02

(0.07)

-0.05

(0.06)

Instrumental Variables(S) Sales tax Cigarette-

specific tax

Both sales tax and

cigarette specific

tax

First-stage F-statistic 33.70 107.20 88.60

Over identifying restrictions J-test and

p-value

- - 4.93

(0.026)

http://www.classof1.com/http://www.classof1.com/http://www.classof1.com/homework_help/index.phphttp://www.classof1.com/homework_help/index.phphttp://www.classof1.com/homework_help/index.phphttp://www.classof1.com/online_tutoring.phphttp://www.classof1.com/online_tutoring.phphttp://www.classof1.com/online_tutoring.phphttp://www.classof1.com/homework_help/finance_homework_help.phphttp://www.classof1.com/homework_help/marketing_homework_help.phphttp://www.classof1.com/homework_help/marketing_homework_help.phphttp://www.classof1.com/homework_help/marketing_homework_help.phphttp://www.classof1.com/homework_help/statistics_homework_help.phphttp://www.classof1.com/homework_help/statistics_homework_help.phphttp://www.classof1.com/homework_help/statistics_homework_help.phphttp://www.classof1.com/homework_help/economics_homework_help.phphttp://www.classof1.com/homework_help/economics_homework_help.phphttp://www.classof1.com/homework_help/economics_homework_help.phphttp://www.classof1.com/solution_library/index.phphttp://www.classof1.com/solution_library/index.phphttp://www.classof1.com/solution_library/index.phphttp://www.classof1.com/solution_library/index.phphttp://www.classof1.com/homework_help/economics_homework_help.phphttp://www.classof1.com/homework_help/statistics_homework_help.phphttp://www.classof1.com/homework_help/marketing_homework_help.phphttp://www.classof1.com/homework_help/finance_homework_help.phphttp://www.classof1.com/online_tutoring.phphttp://www.classof1.com/homework_help/index.phphttp://www.classof1.com/

8/7/2019 classof1econometricsregressionanalysis13-090720062007-phpapp01

2/3

Sub: Economics Topic: Econometrics

www.classof1.com

The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting the sa

lieu of your academic submissions for grades.

This question refers to the panel data regressions summarized in Table 12.1.

a. Suppose that federal government is considering a new tax on cigarettes that is estimated to

increase the retail price by $0.10 per pack. If the current price per pack is $2.00, use the

regression in column (1) to predict the change in demand. Construct a 95% confidence interval

for the change in demand.

b. Suppose that the United States enters a recession and income falls by 2%. Use the regression

in column (1) to predict the change in demand.

c. Recessions typically last less than one year. Do you think that regression in column (1) willprovide a reliable answer to the question in (b)? why or why not?

d. Suppose that the F-statistic in column(1) was 3.6 instead of 33.6. Would the regression

provide a reliable answer to the question posed in (a)? Why or why not?

Solution:

If the federal government introduces a new tax then the retail price will go up by 5% ( 0.10 x

100/20). Then the predicted change in demand will be -0.94 x 5 = -4.70 % i.e. demand will fall

by 4.7%. For 95% confidence interval for the change in demand, here we have n k 1 = 48 2

1 = 45 degrees of freedom. Then for the 97.5th percentile in a t45 distribution c = 2.021. The

required p value is given by 0.21.Thus the 95% confidence interval for the change in demand is -

0.94 0.21(2.021). That is -1.36 ,-.51.

A)The predicted change in demand will be .53 x -2 = -1.06 % i.e. demand will fall by 1.06%.

B)Yes, regression in column (1) provides a reliable answer to the question in (b) because in

presence of the one or more time varying explanatory variables instrumental variable provides

more consistent estimate parameters as compare to the OLS estimation.

C)If the F- statistic in column (1) was 3.6 instead of 33.6 then regression would provide a

reliable answer to question posed in (a) because a decline in F- statistic will not result in F-

statistic going below its critical value c = 3.23 ( F2,45) at 5 % level ,c = 2.39 at 10% level and we

can safely reject the null hypothesis that the variables are jointly insignificant. But if we take c

8/7/2019 classof1econometricsregressionanalysis13-090720062007-phpapp01

3/3

Sub: Economics Topic: Econometrics

www.classof1.com

The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting the sa

lieu of your academic submissions for grades

ClassOf1provides exert guidance for College, Graduate and High schoolhomeworkand liveonlinetutoring on subjects like

Finance,Marketing,Statistics,Economicsand others. Check out more solved problems in ourSolution Library.

at 1% level then c = 5.18 and we can not reject the null hypothesis of joint insignificance ofvariables and answer to question posed in (a) will not be reliable.

** End of the Solution **

http://www.classof1.com/http://www.classof1.com/http://www.classof1.com/homework_help/index.phphttp://www.classof1.com/homework_help/index.phphttp://www.classof1.com/homework_help/index.phphttp://www.classof1.com/online_tutoring.phphttp://www.classof1.com/online_tutoring.phphttp://www.classof1.com/online_tutoring.phphttp://www.classof1.com/homework_help/finance_homework_help.phphttp://www.classof1.com/homework_help/marketing_homework_help.phphttp://www.classof1.com/homework_help/marketing_homework_help.phphttp://www.classof1.com/homework_help/marketing_homework_help.phphttp://www.classof1.com/homework_help/statistics_homework_help.phphttp://www.classof1.com/homework_help/statistics_homework_help.phphttp://www.classof1.com/homework_help/statistics_homework_help.phphttp://www.classof1.com/homework_help/economics_homework_help.phphttp://www.classof1.com/homework_help/economics_homework_help.phphttp://www.classof1.com/homework_help/economics_homework_help.phphttp://www.classof1.com/solution_library/index.phphttp://www.classof1.com/solution_library/index.phphttp://www.classof1.com/solution_library/index.phphttp://www.classof1.com/solution_library/index.phphttp://www.classof1.com/homework_help/economics_homework_help.phphttp://www.classof1.com/homework_help/statistics_homework_help.phphttp://www.classof1.com/homework_help/marketing_homework_help.phphttp://www.classof1.com/homework_help/finance_homework_help.phphttp://www.classof1.com/online_tutoring.phphttp://www.classof1.com/homework_help/index.phphttp://www.classof1.com/