You have been hired by "Indo," the new Indonesian automobile manufacturer to build a model of U.S. car prices in order to help the company undercut U.S. prices. Allowing Friedmaniac zeal to overwhelm any patriotic urges, you build the following model of the price of 35 different American-made 2016 U.S. sedans (standard errors in parentheses): Model A: Î; = 9.0+ 0.28W; + 1.2T; + 5.8C; + 0.19L₁ (0.07) (0.4) (2.9) (0.20) R² = .92 where: Pi = the list price of the ith car (thousands of dollars) Wi = the weight of the ith car (hundreds of pounds) Ti = a dummy equal to 1 if the ith car has an automatic transmission, 0 otherwise Ci= a dummy equal to 1 if the ith car has cruise control, 0 otherwise Li = the size of the engine of the ith car (in liters) a. Your firm's pricing expert hypothesizes positive signs for all the slope coefficients in Model A. Test her expectations at the 5-percent level. b. What econometric problems appear to exist in Model A? In particular, does the size of the coefficient of C cause any concern? Why? What could be the problem? c. You decide to test the possibility that L is an irrelevant variable by dropping it and rerunning the equation, obtaining the following Model T equation. Which model do you prefer? Why? (Hint: Be sure to use our four specification criteria.) Model T: P = 24 +0.29W₁ + 1.2T; + 5.9C; (0.07) (0.30) (2.9) R² = .93
You have been hired by "Indo," the new Indonesian automobile manufacturer to build a model of U.S. car prices in order to help the company undercut U.S. prices. Allowing Friedmaniac zeal to overwhelm any patriotic urges, you build the following model of the price of 35 different American-made 2016 U.S. sedans (standard errors in parentheses): Model A: Î; = 9.0+ 0.28W; + 1.2T; + 5.8C; + 0.19L₁ (0.07) (0.4) (2.9) (0.20) R² = .92 where: Pi = the list price of the ith car (thousands of dollars) Wi = the weight of the ith car (hundreds of pounds) Ti = a dummy equal to 1 if the ith car has an automatic transmission, 0 otherwise Ci= a dummy equal to 1 if the ith car has cruise control, 0 otherwise Li = the size of the engine of the ith car (in liters) a. Your firm's pricing expert hypothesizes positive signs for all the slope coefficients in Model A. Test her expectations at the 5-percent level. b. What econometric problems appear to exist in Model A? In particular, does the size of the coefficient of C cause any concern? Why? What could be the problem? c. You decide to test the possibility that L is an irrelevant variable by dropping it and rerunning the equation, obtaining the following Model T equation. Which model do you prefer? Why? (Hint: Be sure to use our four specification criteria.) Model T: P = 24 +0.29W₁ + 1.2T; + 5.9C; (0.07) (0.30) (2.9) R² = .93
Chapter7: Systems Of Equations And Inequalities
Section7.2: Systems Of Linear Equations: Three Variables
Problem 65SE: The top three countries in oil consumption in a certain year are as follows: the United States,...
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Transcribed Image Text:QUESTION 2
You have been hired by “Indo,” the new Indonesian automobile manufacturer to build a
model of U.S. car prices in order to help the company undercut U.S. prices. Allowing
Friedmaniac zeal to overwhelm any patriotic urges, you build the following model of the
price of 35 different American-made 2016 U.S. sedans (standard errors in parentheses):
Model A: P₁ = 9.0+ 0.28W; + 1.2T; + 5.8C, + 0.19L₁
(0.07) (0.4) (2.9) (0.20)
R² = .92
where: Pi = the list price of the ith car (thousands of dollars)
Wi= the weight of the ith car (hundreds of pounds)
Ti = a dummy equal to 1 if the ith car has an automatic transmission, 0 otherwise
Ci= a dummy equal to 1 if the ith car has cruise control, 0 otherwise
Li = the size of the engine of the ith car (in liters)
a. Your firm's pricing expert hypothesizes positive signs for all the slope coefficients in
Model A. Test her expectations at the 5-percent level.
b. What econometric problems appear to exist in Model A? In particular, does the size
of the coefficient of C cause any concern? Why? What could be the problem?
c. You decide to test the possibility that L is an irrelevant variable by dropping it and
rerunning the equation, obtaining the following Model T equation. Which model do
you prefer? Why? (Hint: Be sure to use our four specification criteria.)
Model T: Î
=
24 +0.29W₁ + 1.2T₁ + 5.9C;
(0.07) (0.30) (2.9)
R² = .93
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