PS5F10 - i j i j j i i i u Seas Ice ice Quantity + + + + =...

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Name: Peter the Anteater UC ID Number: XXXXX Problem Set 5 Econ 122 B – Applied Econometrics Due Nov. 16, 2010 at the beginning of lecture FIRST STEP: PLEASE TYPE YOUR NAME and UCI ID IN THE UPPER RIGHT CORNER OF THIS DOCUMENT. Just erase “Peter the Anteater” and type your name. The data set that we use in this problem is JEC which contains weekly observations on prices and other factors from 1880-1886, for a total of n = 326 weeks. These data were provided by Professor Rob Porter of Northwestern University and were used in his paper “A Study of Cartel Stability: The Joint Executive Committee, 1880-1886” The Bell Journal of Economics, Vol. 14, No. 2, Autumn 1983, 301-314. Using variations in supply associated with the cartel collapses (i.e., temporary collapse of the collusive price-setting agreement due to cheating by members of the cartel from time to time), we want to examine the elasticity of demand for rail transport of grain . a) Estimate the following regression using Eviews:
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Unformatted text preview: i j i j j i i i u Seas Ice ice Quantity + + + + = = + 12 1 , 2 2 1 ) ln(Pr ) ln( Based on this regression output, interpret the coefficient of Price and give a 95% confidence interval for it. So what do you conclude about the elasticity of demand for rail transport of grain based on this regression output? (i.e. summarize your result). b) Explain why the interaction of supply and demand could make the OLS estimator of the elasticity of demand biased. c) Explain why the variable Cartel (= 1 railroad cartel is operative, = 0 otherwise) is a valid instrument for ln( Price ) in the regression model in a). Is it a weak instrument? d) Estimate the regression model in a) using Cartel as an instrumental variable for ln( Price ). Compare the results to those found in a) using OLS. e) Can you test the exogenity assumption for the instrument using the model in (f)? Give reasons for your answer....
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