EBK ECONOMICS
5th Edition
ISBN: 8220106907184
Author: KRUGMAN
Publisher: YUZU
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Chapter 28, Problem 3BCQ
To determine
Concept Introduction:
Economic recession: This period is the early stage of depression. In this period the economy is in declining stage where slowdown is seen in the stock market, household market and there is increase in
Fiscal policy: It is a measure taken by the government to influence the economy of any nation. It is done by the government to adjust the spending level of the economy and also to influence the tax rate.
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CEO Salary and Firm SalesWe can estimate a constant elasticity model relating CEO salary to firm sales. The data set is the same one used in Example 2.3, except we now relate salary to sales. Let sales be annual firm sales, measured in millions of dollars. A constant elasticity model is[2.45]ßßlog (salary) = ß0 + ß0log (sales) + u,where ß1 is the elasticity of salary with respect to sales. This model falls under the simple regression model by defining the dependent variable to be y = log(salary) and the independent variable to be x = log1sales2. Estimating this equation by OLS gives[2.46]log (salary)^=4.822 + 0.257 (sales) n = 209, R2 = 0.211.The coefficient of log(sales) is the estimated elasticity of salary with respect to sales. It implies that a 1% increase in firm sales increases CEO salary by about 0.257%—the usual interpretation of an elasticity.
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