Question

Consider the following regression equation for the United States (standard errors in parentheses):

            where: P_t      = per capita pounds of pork consumed in time period t

                        PRP_t = the price of pork in time period t

                       PRB_t = the price of beef in time period t

                       YD_t   = per capita disposable income in time period t

(a) Hypothesize signs and specify the appropriate null and alternative hypotheses for the coefficients of each of these variables.

(b) State your decision rules and then test your hypotheses on the above results using the t-test at a 5% level of significance.

(c) If you could add one variable to the regression, what variable would you add? Why?

Answer 1

Note: The regression equation is not avaialbale in the question. However, have found a similar question internet and hence I am using the same regression equation to help you go through the explanation of the same.

The regression equation is:

Standard errors:

PRPt =0.005

PRBt = 0.020

YDt = 0.04

(a) Hypothised signs:

PRP : Negative, As prce of pork increases, its demand is expected to fall

PRB: Positive, the demand for pork increases as the price of beaf increases as beaf and pork are substitute goods.

YD: Positive, Asuming pork to be a normal good,ts demand increases with increase in income.

Hence, the hypotheis are as follows:

(b) The t statistic for the three variables can be calculated using the general formula:

The t critcal value for a 5% one sided test with 25 degree of freedom is 1.708

The t statistic for PRPt = -2. Hence, we reject H0

The t statistic for PRBt = 1.5. Hence, we fail to reject H0

The t statistic for YDt = 5. Hence, we reject H0

(c)We can use Tastes of the consumer as another variable.