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# PracticalOne_handout - Econ 1002: Practical Lecture 1 Wage...

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1 Econ 1002: Practical Lecture 1 February 10 th 2009 Matthew Wakefield (IFS/UCL) Consumer Demand Question Consumer Demand Question • Given 3 regressions, for spending on three categories of good in a supermarket • Note the regressions are in Double Log form – This means coefficients on log terms are elasticities! • Given t-stats alongside coefficients • Given R-squareds

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2 (a) Assume that each household spends a constant fraction of its total budget at Mega- lomart. Which goods are luxuries and which are necessities? For which goods would you reject a total budget elasticity of one? • Necessity if total budget elasticity +ve, but less than 1. Luxury is greater than one. • Let b x be coefficient on total budget in double-log demand eqn. Then: Total Budget elast (good i) = ln qi = b x ln x • So need to test whether coefficients on x significantly different from 1 a) … continued • So t-tests, t-stat has form: |(Coeff – 1)/s.e.| • Given t-values (for test against 0): need to find standard errors (s.e.) • Reported T-value = Coeff/s.e. s.e. = Coeff / t-value • For meat = 1.32 / 4.78 = 0.276 • For veg = 0.66 / 3.32 = 0.199 • For bakery products = 0.95 / 7.12 = 0.133 a) Continued • Use standard errors to construct t-tests of hypothesis that the coefficient on total budget has value 1, and thus answer question: Meat: – Coeff 1.32 > 1, suggests LUXURY – |t| = |(1.32-1)/0.276| = 1.16 < 1.96 , CANNOT reject elasticity of 1
3 a) Continued Vegetables – Coeff 0.66 < 1, suggests NECESSITY – |t| = |(0.66-1)/0.198| = 1.71 < 1.96, CANNOT reject elasticity of 1 Bakery Products – Coeff 0.95 < 1, suggests NECESSITY – |t| = (0.95-1)/0.133| = 0.375 < 1.96 CANNOT reject elasticity of 1 (b) Which goods are price elastic and which price inelastic? • In Double-log specification, if coefficient on OWN ln price is b pi, then: – Price elastic if b pi < -1 – Price inelastic if 0 < b pi < -1 • Being asked to comment on size of own price coefficients, and whether these are significantly different from -1 b) Continued • To test significance, again need to derive s.e. For meat, we have – coefficient = - 0.76, reported t-value = 2.25 – Standard error therefore: 0.76/2.25 = 0.338 – T-test against possibility of -1: • |t| = |(- 0.76 - -1)/0.338| = |(-0.76+1)/0.338| = 0.71 < 2 • Thus, coeff less negative than -1, suggests price inelastic , but cannot reject elasticity as large (in magnitude) as -1

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## This note was uploaded on 03/03/2010 for the course ECON 1002 taught by Professor Matthewwakefield during the Spring '09 term at UCL.

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PracticalOne_handout - Econ 1002: Practical Lecture 1 Wage...

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