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Unformatted text preview: Lahore School of Economics MPHIL Advanced Econometrics Winter 2011 Quiz 1 Question 1. Suppose you were interested in looking at the demand for cars sold in Lahore and obtained time series data on the yearly demand for cars (a variable called CARS t ), the yearly average prices of cars (a variable called CARPRICE t ), the yearly average price of petrol (a variable called PETROL t ). (A) (5 points) Suppose the econometrician decides to ‘detrend’ each of the variables. Practically, this means that the econometrician regresses each variable against a time variable like “Year” which is simply a variable that equals 1 for year 1, 2 for year 2, etc. Suppose the detrended variables are denoted with an “*”. Explain how the slope coefficients in the following regressions would compare: CARS t = β 1 + β 2 CARPRICE t + β 3 PETROL t + β 4 Year + u CARS t * = α 1 + α 2 CARPRICE t * + α 3 PETROL t * + u* (B) (5 points) The Frisch Waugh Theorem generally states that if a regression model is defined as:...
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 Spring '10
 Cowell
 Econometrics, Regression Analysis, regression model, Frisch Waugh Theorem

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