ECON2206 assignment 2 - Answers a)(LPM) .Inthe LPM,(y=...

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Answers  a) The model is known as a linear probability model (LPM) because it consisted a binary  dependent variable namely ecobuy and tthe response probability is linear in the parameters. In the  LPM,  β 1 is interpreted as changes in the probability of success (y=1 where family are buying  ecolabeled apples) given a one dollar increase to the price of ecolabeled apples, holding all other  factors fixed.  b) Additive error occur as a result of overspecifying the regression model however the  measurement error will not cause bias or inconsistency to the intercept and OLS estimators of say  B 1 because it satifies MLR1-4.  But since it violates MLR 5 homoskedasticity assumption implying  to the presence of heteroskedasticity, it will have undesirable impact will be on the variances of  the OLS estimators making it asymptotically inefficient where the variance could either be too  large or too small thus impacting on the standard errors making the usual construction of  confidence levels, t and F statisitics no longer valid.  c)  ecobuy= 0.424 - 0.803ecoprc + 0.719regprc + 0.00055faminc + 0.024hhsize + 0.025educ -  0.00050age     (.165)    (.109)                    (.132)                  (.00053)          (.013)        (.008)   (.00125) n= 660       R2= 0.110 Educ appears to have most important effect among the non-price variable factors. So an extra year  of schooling implies an increase of 0.025 in the estimated probability of buying ecolabeled apples.  This suggests that more highly educated people will be more inclined to purchase apples that are  environmentally friendly.     d)  ecobuy= 0.424 - 0.803ecoprc + 0.719regprc + 0.00055faminc + 0.024hhsize + 0.025educ -  0.00050age          (.165)   (.109)                     (.132)               (.00053)          (.013)   (.008)    (.00125) OLS standard errors         [.167]   [.105]                    [.130]                [.00052]
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This note was uploaded on 03/25/2012 for the course ECON 2206 taught by Professor Yang during the Three '11 term at University of New South Wales.

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ECON2206 assignment 2 - Answers a)(LPM) .Inthe LPM,(y=...

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