Question

Consider the following estimated models of the consumption function:

                     C = 220 + 0.83 Yd - 0.075 P                             (2.1)

                                       (3.54)        (2.35)                          

                           R squared = 0.86

                   ln C = 315.25 + 0.75 ln Yd – 0.082 ln P            (2.2)

                                             (5.32)             (3.26)

                           R squared = 0.965

(a)Explain the distinction between the estimated models (2.1) and (2.2)

                 (Read chapter 7 : “Choosing a Functional Form”)

(b)Interpret the coefficients of the income variable in both estimated models.

(c)In your opinion, which model produces more robust results ? Explain your opinion.

Answer 1