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a) Log-Log model A log-log model is a model where both the dependent variable and the explanatory variable(s) are in logarithmic form. That is, the econometric model measures the effect of a relative or percent change in the explanatory variable on the effect of the relative or percent change of the dependent variable (Y). Log-Linear models are good at testing production functions, such as the CobbGood Douglas model. Log-Lin Model The semi-log model is as follows: A log-lin model is an econometric model where the dependent variable (Y) is in logarithmic form (measuring relative/percent change) and the explanatory variables are in linear form (measuring absolute change). The substitution effect could be estimated by this method. Good Lin-Log Model This is an econometric model where the dependent variable (Y) is in linear form (measuring absolute change) and the explanatory variables are in logarithmic form (measuring relative change). Actually existing marginal propensities to consume could be estimated in this fashion. Good

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b) A slope coefficient measures the absolute change (linear) of the dependent variable (Y variable) with respect to the absolute change in the x variable (explanatory) that is, it usually measures the effect of a unit change in the x variable on an absolute change in the Y variable. Elasticity coefficient measures the percent change of the y variable over the percent change of the x variable. These are relative values with respect to each other. While they should correlate in sign, they answer two different questions. The slope coefficient gives the ==== absolute value by which the dependent variable changes from a change in the x value but it does not allow us to determine whether or not that effect was relatively significant with respect to the variable. A dependent value change of 100 might only be a change of .003% based on the range of the dependent variable; in another case, a change of .003 from might cause the Y value to change by a relative percentage of 99%. ? see the key Taking from the other side, we see the benefits of elasticity measures but with just this coefficient, we are left without information as to what is exactly changing 10% change only tells us the change relative within the model but it does not allow us to make judgments outside of the model. In fact it might even be misleading. A dollar increase in a minimum wage per hour could register as a nearly 25% increase but it would only be by interpreting the slope coefficient that an economist could reasonably tell whether or not this extra dollar would affect consumption as much as say a 25% increase in 1000 dollars per hour. It is through a combination of these coefficients that we can interpret the meaning of the econometric model.

3) a) The explanatory slope coefficient for model A show that for every dollar increase per pound of coffee, the cups of coffee consumed per person per day decreases by 0.4795 cups. Good The explanatory slope coefficient for Model B shows that for every 1 percent increase in the price of coffee in dollars per pound, the amount of cups consumed per person per day decreases by .2530 cups. Good

-2 b) The price elasticity for Model A = -0.4795*(2.43/1.11) = -.1049

The price elasticity for Model B is -.1041.

see the key

c) The Demand for coffee is relatively inelastic a price increase barely effects the consumption of coffee. d) The intercept says that the average value of Y is 0.7774 cups if the value of lnX is zero. ,i.e. when the e) Model B is superior because it allows us to measure the price elasticity easier than Model A. The experiment seems concerned with the effect of price on consumption in other words, it seems to be concerned specifically with price elasticity.

price=$1

4 a) Categorical Variables: Categorical Variables are variables that can take one value of a limited amount of values (usually indexed values), where the data can be divided into groups. The values themselves symbolize the classification groups; for example, age/sex/race/education level are all possibilities for categorical variables. Good b) Qualitative Variable: Qualitative variables are variables where each of the symbols given (either numeric or letter or other) represents a specific category. They have no intrinsic sense of ordinal rank i.e. 2 is not necessarily greater than 1, unless the categories they stand for are interpreted as greater (say increasing income groups). They can be quantified through artificial variables which stand for the presence or absence of a quality. Good c) A Dummy Variable Trap arises when every categorical variable is given a dummy variable, resulting in in perfect collinearity or the correlation between two independent variables is either 1 or -1. An example of a dummy variable trap would be if we were testing the categorical variable of hair color with the categories of brown hair or blonde hair and we introduced two dummy variables (0-1 for brown hair and 0-1 for blonde hair). Then there would be perfect collinearity between the variables. ok 5 a) I expect the coefficients to be positive for all of the variables I am a little confused what exactly is meant by years of service (does that mean in the military or in the workfield?) but even if we take the factor that is likely to have the least effect years of service in the military

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it is likely that military service would have a positive influence on MBA admissions in terms of scholarships or simply on the resume, leading to a positive effect on earnings. As for the two dummy variables, both are top business schools and likely to have a strong, positive influence on MBA earnings. years of service=how long the individual has been working=years of experience b) 2 and B3 give us the differential effect of the Harvard MBA graduate earnings and Wharton MBA graduate earnings that is, since the effect is most likely positive, they give the average you need to be more specific for each difference above the average earnings of an MBA graduate. coefficient. see the key c) B2 > B3 would imply that attending Harvards business school is likely to have a greater positive effect on ones post-graduate earnings than attending Whartons school (it cannot be concluded whether both coefficients are positive, negative or one positive and one negative, so we cannot know the character of this difference).