Price State Activity Elasticity Elasticity 0.26 0.77 0.92 114 106 099 -0.83 -0.9
ID: 1143134 • Letter: P
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Price State Activity Elasticity Elasticity 0.26 0.77 0.92 114 106 099 -0.83 -0.99 -0.87 Aid to needy people Pollution control Colleges and universities Elementary school aid Parks and recreational areas Highway construction and -102 -109 maintenance Source: B. B. Gibson, "Estimating Demand Elasticities for Public Goods from Survey Data," American Economic Review (December 1980), pp. 1068-1076 (a) Do these public goods conform to the law of o demand? For which public goods is demand price elastic? (b) What types of goods are these public s goods? (c) If the price or cost of college and 7 university education increased by 10 percent and, at o the same time, incomes also increased by 10 percent, o what would be the change in the demand for college s and university education? 1 9. Following are the results of four regressions, in which M refers to the imports and Y to the GNP of the United States (both in billions of current dollars) from 1985 to 2000, and P is the consumer price index. Theory postulates that imports are directly related to the level of GNP and domestic prices. 0 (1) M=-108.20 + 0.045T+0.93 IP (1.232) (1.844) R-09894 R2-09877 (2) M=-69.97 + 0.1120 F=604621 (32.08) R'= 09866 F=1029.40 (3) M--555.84-13.81P (42.18) R2-0.9922 F# 1778.84 (4) MIP--1.39+0.2021/P (12.22) R 0.9142 F 149.25 Explain (a) why the first three regression results indicate the presence of serious multicollinearity and (b) how the fourth regression attempts to overcome the multicollinearity problem.Explanation / Answer
a. In first equation GNP(Y) and price(P) are two independent variables but there is high degree correlation between P and Y, the independent variables should be independent from any other variable of the equation otherwise our results will be incorrect.
In second and third equation we missed one of these independent variables it could alter our result as well.
b. Equation 4 is treating multicollinearity by adjusting one variable without removing it now we have only two variable dependent variable real import(M/P) and independent variable real GNP or real income(Y/P). Therefore there is no multicollinearity between independent variables.
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