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Based on 11 annual observations, the following regressions were obtained:
Model A: Ŷt = 2.6911 - 0.4795Xt
se = (0.1216) (0.1140) r2 = 0.6628
Model B: InŶt = 0.7774 - 0.2530 In Xt
se = (0.0152) (0.0494) r2= 0.7448
where Y = the cups of coffee consumed per person per day and X = the price of coffee in dollars per pound.
a. Interpret the slope coefficients in the two models.
b. You are told that = 2.43 and = 1.11. At these mean values, estimate the price elasticity for Model A.
c. What is the price elasticity for Model B?
d. From the estimated elasticities, can you say that the demand for coffee is price inelastic?
e. How would you interpret the intercept in Model B?
f. Since the r2 of Model B is larger than that of Model A, Model B is preferable to Model A. Comment on this statement. |
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