Problem1:

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.

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)
2
R = 77.8% D.W. = 1.78 n = 16


B. ln Yt = 10.462 - 1.39 ln X2t
(0.307)
2
R = 59.5% D.W. = 1.495 n = 16

Correlation matrix:
ln X2 ln X3 ln X4 ln X5
ln X2 1.0000 -.7219 .3160 -.7792
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?
b) Are these coefficients statistically significant?
c) Use the results of Model A to test the following hypotheses:
i) The demand for roses is price elastic
ii) Carnations are substitute goods for roses
iii) Roses are a luxury good (demand increases more than proportionally as income rises)
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.

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.
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).
 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 + 2DVt + 3Vt + 4DV*Vt + 5Kt + 6DV*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 Coefficien Std. Error t-Statistic Prob.
t
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 var 72.59075
Adjusted R-squared 0.802523 S.D. dependent var 47.24981
S.E. of regression 20.99707 Akaike info criterion 9.064124
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.
(b) Comment on the overall fit and statistical significance of the model.
(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?
(d) On the basis of the above results, is pooling the data from the two firms appropriate?
Explain.
(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

Note: We can have similar questions using results from eviews to check for autocorrelation and
heteroscedasticity (Breusch Godfrey test and White test).