ECON 414
Answers to Homework 1
Answers to Homework 1
1
Chapter 1
Exercise 1.1
We would expect ice cream consumption to depend on its price and how hot the day is.
Income might also be important, but less so than the above variables.
Thus, a possibe
specification is
Demand
=
β
1
+
β
2
Income
+
β
2
Price
+
β
4
Temp
+
u
where
•
Demand
is the weekly consumption of ice cream (say, in gallons).
•
Price
is the price per gallon.
•
Income
is the average weekly income.
•
Temp
is the average of the daily high temperatures for the week.
•
u
is the error term.
As temperature goes up, we would expect more people to buy ice cream and hence we would
expect
β
4
to be positive. If ice cream is more expensive, then demand would fall. Hence, we
would expect
β
3
to be negative. Finally, income effect is expected to be positive and hence
β
2
is likely to be positive.
If we obtain cross section data at a given point in time, that is, across individuals, then
temp
and
price
will not vary across individuals and hence we cannot estimate the model.
Therefore, time series data are more appropriate.
Exercise 1.4
There are two types of variables in a regression model:
independent
and
dependent
.
The
dependent variable in a regression model is the attribute of an observation which we are
interested in studying. An independent variable is an attribute that affects the value of the
dependent variable.
Parameters explain how independent variables affect on dependent variable. In the sense
of economic theory, a parameter is the marginal effect on the dependent variable of a unit
increase in a corresponding independent (that is, explanatory) variable.
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 Spring '07
 Rashidian
 Econometrics

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