Cypress River Landscape Supply is a larege wholesale supplier of landscaping mat
ID: 1253175 • Letter: C
Question
Cypress River Landscape Supply is a larege wholesale supplier of landscaping materials in Gerogia. Cypress River's sales vary seasonally; sales tend to be higher in the spring months than in other months.a. Suppose Cypress RIver estimates a linear trend without accounting for this seasonal variation. What effect wouls this ommiosn have on the estimated sales trend?
b. Alternatively, suppose there is, in fact, no seasonal pattern to sales and the trend line is estimated using dummy variables to account for seasonality. What effect would this have on estimation?
Explanation / Answer
a. This will overestimate the variance and lead to inefficient standard errors. At the same time, the marginal effect will be biased depending on when the data starts and finishes. If the data begins in winter and ends in the spring, then the marginal effect will be biased upward. If the data begins in the spring and ends in the winter, then the marginal effect will be biased downward. If the data begins and ends in the same season, then there may still be omitted variable bias, but the direction is undetermined. b. This will not actually cause any problems unless seasonality is correlated with something else that correlates with sales. If there is no direct or indirect relationship between sales and seasonality, then the coefficients associated with the dummies will simply be estimated as statistically no different than zero. You lose degrees of freedom, so you lose a little efficiency in the standard error of other control variables. But there are no serious consequences.
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