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Cons_ExpShares_handout

# Cons_ExpShares_handout - ECON 1002 B2 A researcher...

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ECON 1002 /CONTINUED ECON 1002 Page 4 B2) A researcher estimates the following demand system model for spending on transport in fiscal year 2003/4 in urban and rural areas. Variable Dependent variable: w_P Dependent variable: w_B Urban Rural Urban Rural Constant 0.094 0.185 0.191 0.157 (0.035) (0.044) (0.051) (0.091) Ln P_P -0.021 0.093 0.061 -0.011 (0.003) (0.021) (0.019) (0.008) Ln P_B -0.035 -0.003 0.182 0.015 (0.012) (0.012) (0.031) (0.011) Ln X 0.037 -0.011 -0.061 -0.031 (0.016) (0.021) (0.021) (0.016) Number of children 0.119 0.132 0.043 0.012 (0.022) (0.031) (0.038) (0.007) No of obs 4823 2117 4823 2117 R 2 0.104 0.213 0.240 0.152 Mean of dependent variable 0.12 0.63 0.44 0.18 Note to table: Numbers in brackets are standard errors In the above table w_P is the budget share on petrol, w_B is the budget share on bus tickets, P_P and P_B are the prices of each good respectively and X is total expenditure on travel (comprising expenditures on petrol, bus tickets and train fares) a) Derive an expression for the elasticity of demand for petrol with respect to total expenditure in a budget share specification such as the one above and show that it is not constant. b) Consider a household with an average expenditure share for their region. Calculate whether petrol is a necessity or luxury for urban and rural households. [Pay attention to the statistical significance of your results.] c) What do the estimated own-price effects in this model tell you about whether petrol and

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Cons_ExpShares_handout - ECON 1002 B2 A researcher...

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