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Unformatted text preview: Principles of Economics I
Economics 101 Announcements Readings: Discussion Sections this week CTools notes Chapter 6 Passover New assignment available Quiz in section this week Runs through the exam period (therefore conflicts with the final for this course) Please contact me SOON if Passover obligations will prevent you from sitting the final at the predetermined time Ordinary Least Squares If the real (but unknown) demand function has the form:
Qd = a + b1 P + b2 x2 + ...+ bn xn + Estimate demand using:
^ ^ ^ ^ ^ Q d = a + b1 P + b2 x 2 + + bn x n where parameters are chosen to minimize the sum of all squared residuals. Ordinary Least Squares To calculate residuals: For each observation of demand, we know: Qd i.e. the dependent variable; and P, x2..., xn i.e. the independent variables Evaluate the estimated function using the observed values of the independent variables: ^ ^ ^ ^ ^ Q d = a + b1 P + b2 x 2 + + bn x n Find the difference between the observed and estimated quantities demanded, using the same independent variable values: ^ ^ ^ ^ e = Q d - [a + b1 P + b2 x 2 + + bn x n ] OLS an example Real (but unknown) demand fn: Qdi = a + b Pi + i Three observations:
1) 2) 3) (Qd1, P1) = (1, 6) (Qd2, P2) = (8, 4) (Qd3, P3) = (3, 6) P OLS an example e = 1
3 6 Slope = 1/3 2 e = 2 e1 = 1 Qd =...
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