Submit the project as a Word document with Excel file that includes the estimation results and the complete dataset you have used.

The following table gives information on the quantity demanded of commodity X (Qx), its price (Px), and the price of related good Y (Py) from 1980 to 2011.

Qx Px Py Income Advertising

1980 120.5 280 230

1981 140.2 240 250

1982 135.1 265 240

1983 163.7 250 250

1984 142.4 240 240

1985 131.6 270 245

1986 180.8 240 220

1987 201.7 215 280

1988 164.8 250 276

1989 133.6 265 250

1990 137.8 265 249

1991 183.3 240 240

1992 211.7 230 240

1993 237.5 225 234

1994 209.5 225 250

1995 196.8 220 235

1996 159.5 230 240

1997 183.2 235 250

1998 190.5 245 249

1999 205.5 240 240

2000 175.7 250 289

2001 191.6 240 230

2002 212.7 240 250

2003 202.2 235 240

2004 220.8 220 231

2005 221.2 218.7 239

2006 223.9 220 257

2007 225.1 219 236

2008 229 216.5 230

2009 231.9 215.6 230

2010 233 213 256

2011 234.5 212.5 245

 
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the Income and Advertising variables must be filled in by each student as follows:

• Income variable: RGDP data for Angola

The data for this variable must come from the Penn World Tables. Go to: http://www.rug.nl/research/ggdc/data/penn-world-table and from the Excel file available on that page (middle of page under Expert Data Access), copy and paste the RGDP data for Angolafrom 1980-2011 (use the RGDP variable with the name ‘RGDPna’ from this database). (Please remember to cite your source.)

• Advertising: For this variable each student must fill in the table with whatever random 3-digit values he wants.

REQUIREMENTS;

(1) (i) UsingExcel, estimate using regression analysis the linear demand equation of Qx on Px, Py, Income and Advertising. Write down this estimated equation.

(ii) Assume that in 2012 Px, Py, Income, and Advertising are all 10% greater than their 2011 value.Using the estimated equation in the previous part, calculate all the point elasticities of demand (price, income, cross price, and advertising elasticities) in Year 2012. Comment on your results (e.g. is demand for X elastic or inelastic; are X and Y substitutes or complements; is X a normal or an inferior good; is X a luxury or a necessity; is X sensitive to advertising or not).

(iii) Explain how a business may utilize these elasticities to inform its decision-making process.

(2) (i) Using Excel, transform all variables into natural logarithms (ln). Then use these variables to estimate the demand equation in log-linear form (i.e. ln(Qx) on ln(Px), ln(Py), ln(Income) and ln(Advertising). Write down this estimated equation.

(ii) Based on the estimated log-linear model, what are the elasticities of demand (price, income, cross price, and advertising elasticities)? Do the conclusions you have reached in Part 1(ii) still hold?Explain your answer.

(3) (i) For each model (linear and log-linear model), investigate which of the explanatory variables are individually statistically significant at the 5% significance level. Explain your answer.

(ii) Conduct an F-test (at the 1% significance level) for each model and comment on the results.

(iii) Based on economic theory and the statistical tests you have conducted, which model do you consider preferable (the linear or log-linear model)? Explain fully your answer.

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