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hw1sol

# hw1sol - ECON 414 Answers to Homework 1 Answers to Homework...

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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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