19. Cross-sectional data were used to estimate the following profit function for firms: π₁ = B₁ + B₂ri + B3 Si + Ui where is profit, r is a measure of tariff protection and s is the total sales for the firm. It is hypothesised that the variance of the error term is not constant but is related to one of the explanatory variables. a) Explain carefully how you would test the hypothesis of non-constant variance of the error term. b) If the relationship were to be estimated by OLS, what would be the consequences? c) Explain how you would proceed to estimate the model if the variance of the error term were proportional to S².
19. Cross-sectional data were used to estimate the following profit function for firms: π₁ = B₁ + B₂ri + B3 Si + Ui where is profit, r is a measure of tariff protection and s is the total sales for the firm. It is hypothesised that the variance of the error term is not constant but is related to one of the explanatory variables. a) Explain carefully how you would test the hypothesis of non-constant variance of the error term. b) If the relationship were to be estimated by OLS, what would be the consequences? c) Explain how you would proceed to estimate the model if the variance of the error term were proportional to S².
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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this question is about the module: introduction to financial econometrics
if the question is about explaining please use the graph or an example to support your explanation if necessary.
if the question is about calculation please show your workings as much as possible.
Transcribed Image Text:19. Cross-sectional data were used to estimate the following profit function for firms:
π₁ =B₁ + B₂ri + B3 Si + Ui
where is profit, r is a measure of tariff protection and s is the total sales for the firm. It
is hypothesised that the variance of the error term is not constant but is related to one of
the explanatory variables.
a) Explain carefully how you would test the hypothesis of non-constant variance of the
error term.
b) If the relationship were to be estimated by OLS, what would be the consequences?
c) Explain how you would proceed to estimate the model if the variance of the error term
were proportional to S².
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