Quetion #6.

8:

(a)How would you interpret the coefficients of P, I, and P’?

The coefficients are as follows:
The own-price elasticity: -0.1647
The Income elascity; 0.5115
The Crossprice Elasticity 0.1483

(b) Is the demand for coffee price elastic?

The coefficient is less than one so it is inelastic in absolute value.

(c)Are coffee and tea substitute or complementary products?

Coffee and tea are substitute products beacause cross-price elasticity is positive

(d)How would you interpret the coefficient of t?

and

(e). What is the trend rate of growth or decline in coffee consumption in the United States?
If there is a decline in coffee consumption, what accounts for it?
-0.0089 Co-efficient trend shows over the sample coffee consumption had been declining at
0.89 percent quaterly.Decline may be due to side effects of caffeeine

(f) What is the income elasticity of demand for coffee?

Income elasticity of demand for coffee is 0.5115.

(g) How would you test the hypothesis that the income elasticity of demand for coffee is
not significantly different from 1?
The income elasticity coefficient estimated value is 1.23, which is not statistically significant.
So, testing hypoyhesis doesnt make sense that it is not different from one.

(h)What do the dummy variables represent in this case?

Seasonal effects are represented by dummies, if any.

(i) How do you interpret the dummies in this model?

Coefficient of dummies describes difference of average value of ln Q from base quater I.e
fourth quater.In various quaters actual values of intercepts are respectively, 1.1828, 1.1219,
1.2692, and 1.2789.By taking antilogs we have : 3.2635, 3.0707, 3.5580, and 3.5927 as the
average pounds of coffee consumed per capita in the first, second, third, and the fourth
quarter, having the values of the logs of all explanatory variables zero.

(j) Which of the dummies are statistically significant?

The coefficients of dummies D1 and D2 are individually statistically significant.

(k) Is there a pronounced seasonal pattern in coffee consumption in the United States? If
so, what accounts for it?
It will be in the case of quarters one and two. Considering other things,weather and coffee
prices and weather may have seasonal pattern in these two quarters.

(l) Which is the benchmark quarter in this example? Would the results change if we chose
another quarter as the base quarter?
The benchmark is the fourth quarter. The numerical values of the dummy coefficients will
change if we choose another quater for base.

(m) The preceding model only introduces the differential intercept dummies. What implicit
assumption is made here?
The implicit assumption is that coefficients of partial slope do not change among quarters.

(n)Suppose someone contends that this model is misspecified because it assumes

that the slopes of the various variables remain constant between quarters. How
would you rewrite the model to take into account differential slope dummies?
We can incorporate differential slope dummies as follows:

(o)If you had the data, how would you go about reformulating the demand function for
coffee?
If we can estimate the model given in (n). If coffee have other subtitutes, they can be
brought in the model.

Question #6.9:
(a) What is the rationale for introducing both carriers and squared carriers as
explanatory variables in the model? What does the negative sign for carriers and
the positive sign for carriers squared suggest?
Economies or diseconomies of scale can be found this way.In general, if the first derivative
(i.e., the slope) is negative but the second derivative is positive , it shows slope is negative
with increasing trend, which means, the negative slope will be less steep as the value of the
variable increases.

(b) As in part (a), what is the rationale for the introduction of miles and squared miles as
explanatory variables? Do the observed signs of these variables make economic sense?
The reasoning will be same as part a except miles has a positive sign and miles squared has a
negative sign.In general,at given point the first derivative is positive but second derivative is
negative,so there function is increasing at decreasing rate. In present case,it is a case of
economies of scale, more the distance in miles is, the lesser is the incremental fare.

(c) The population variable is observed to have a negative sign. What is the implication
here?
For traffic volume ,population may be a proxy. Perhaps economies of scale can be indicated
here by negative sign.

(d) Why is the coefficient of the per capita income variable negative in all the regressions?
This sign is rather confusing.Although it is negative, the coefficient is significant only for the
“discount” category.

(e) Why does the stop variable have a positive sign for first-class and coach fares but a
negative sign for discount fares? Which makes economic sense?
Economic sense is indicated through negative sign higher the stopovers, greater will be taken
the time to travelSo,, the fare will be lower to trigger awareness among passengers to travel
with various stopovers.

(f)The dummy for Continental Airlines consistently has a negative sign. What does this
suggest?
It depicts that for Continental Airlinesthe average level of fare is less than its competitors’.

(g)Assess the statistical significance of each estimated coefficient. Note: Since the number
of observations is sufficiently large, use the normal approximation to the t distribution at
the 5% level of significance. Justify your use of one-tailed or two-tailed tests.
The critical Z value is 1.96 (5%, two-tailed) or 1.65 (5%, one tailed).The coefficient in question
is statistically significant if computed Z value exceeds critical values.

(h)Why is the slot dummy significant only for discount fares?

It is not clear why it is significant only for the “discount” category.Although this dummy
coefficient is expected to be positive for all categories.

(i) . Since the number of observations for coach and discount fare regressions is the
same, 323 each, would you pull all 646 observations and run a regression similar to
the ones shown in the preceding table? If you do that, how would you distinguish
between coach and discount fare observations? (Hint: dummy variables.)
In that case,
Yes, these observations can be gathered atone place. In that case, An additional dummy
willbe introduced for the “coach” or “discount” fares.

(j) Comment on the overall quality of the regression results given in the preceding table.
Overall, the results are a mixed.For this sample size although the R2 s are high and although
various coefficients are statistically significant, some of the coefficients have doubtful signs.

Question #6.19:
(a) The EViews regression results are as followbased on 19 observations:

These results show, an unsurprising finding,there is a statistically significant positive

relationship between the two variables.
(b) , (c),and (d)
By introducing three dummies we can differentiate four quaters can also interact them with
the profits variable. This exercise showed no satisfactory results, since both the dummies
and interaction terms were completely insignificant, so it is suggested that no seasonality
involved.Thats why for most companies do not change their dividends quaterly.
In the present case there is no reason to consider explicitly seasonality.

Question #6.26: