9781118041581

Summary 171

Here, Q denotes annual cigarette consumption, P is the average price of

cigarettes, Y is per capita income, A is total spending on cigarette

advertising, and W is a dummy variable whose value is 1 for years after

1963 (when the American Cancer Society linked smoking to lung

cancer) and 0 for earlier years. The t-statistic for each coefficient is

shown in parentheses. The R^2 of the equation is .94.

a. Which of the explanatory variables have real effects on cigarette

consumption? Explain.

b. What does the coefficient of log(P) represent? If cigarette prices

increase by 20 percent, how will this affect consumption?

c. Are cigarette purchases sensitive to income? Explain.

6. The following regression was estimated for 23 quarters between 2004
   and 2011 to test the hypothesis that tire sales (T) depend on new-
   automobile sales (A) and total miles driven (M). Standard errors are
   listed in parentheses.

Here, N 23, corrected R^2  .83, F 408, standard error of the

regression 1.2, and Durbin-Watson statistic 1.92.

a. Does the regression equation (and its estimated coefficients) make

economic sense? Explain.

b. Based on the regression output, discuss the statistical validity of the

equation.

c. Do the coefficients on “miles driven” and “new-auto sales”

significantly differ from 1.0? Explain why we might use unity as a

benchmark for these coefficients.

d. Suppose that we expect “miles driven” to fall by 2 percent and “new-

auto sales” by 13 percent (due to a predicted recession). What is the

predicted change in the sales quantity of tires? If actual tire sales

dropped by 18 percent, would this be surprising?

7. A water expert was asked whether increased water consumption in a
   California community was lowering its water table. To answer this
   question, the expert estimated a linear regression equation of the
   form

where W height of the water table and t time measured from the

start of the study period. (He used 10 years of water-table

measurements.) The estimate for b was b .4 with a t-value of 1.4.

a. From this evidence, would you conclude that the water table was

falling?

Wabt,

1 .32 2 1 .19 2 1 .41 2

%¢T.451.41 1 %¢M 2 1.12 1 %¢A 2

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