Gretl Empirical Exercise 2 KEY EXERCISES: 1. Setup a two-variable regression model (i.e.

. write down the PRF) to examine the impact of per capita disposable income on real per capita gasoline expenditures. = + + a. Based off your know knowledge of microeconomic theory, what are your expectations about the sign of ? Why? Microeconomic theory tells us that gasoline is a normal good meaning that as consumer income increases the demand for gasoline will also increase. Therefore, we would expect in this regression to have a positive sign. b. Estimate the model. Display your regression results.

Model 2: OLS, using observations 1953-2004 (T = 52) Dependent variable: RealGasCap Coefficient Std. Error 1.92805e-06 1.65109e-07 1.78968e-010 9.33786e-012 4.94e-06 6.85e-12 0.880191 367.3304 697.3088 -1386.715 0.935677 t-ratio 11.6774 19.1659 p-value <0.00001 <0.00001

const Income

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Mean dependent var Sum squared resid R-squared F(1, 50) Log-likelihood Schwarz criterion rho

S.D. dependent var S.E. of regression Adjusted R-squared P-value(F) Akaike criterion Hannan-Quinn Durbin-Watson

1.06e-06 3.70e-07 0.877795 1.09e-24 -1390.618 -1389.121 0.098019

c. Is statistically significant? How do you know? Assuming a two-tailed test (i.e. : = 0; : 0) and 50 degrees of freedom (n-2), and a significance level of 5% (=0.05) the critical t value is 2.021 (I am using the value corresponding to 40 degrees of freedom in Table E-2 since 50 df is not listed; however, as we know the distribution approaches the normal distribution as the number of degrees of freedom increase. So in this case it would also be okay to use the value from the Z table of 1.960.) Since the

calculated t-stat = 19.1659 (t-ratio as Gretl puts it) is greater than this critical value we can REJECT the null in favor of the alternative that is different than zero. So YES, is statistically significant. Alternatively, we could simply look at the reported p-value for the coefficient which tells us the lowest level of significance () at which we could still reject the null. Since it is <0.00001 we know that is significantly different than zero. d. Comment on the sign of . Does this align with your expectations? Provide an interpretation of the slope coefficient . The estimated Income coefficient is positive. Therefore, it does align with our expectations of gasoline as a normal good. The estimated coefficient of 1.79 10 means that a one dollar increase in per capita disposable income will lead to a 0.179 dollar increase in real per capita gasoline expenditures.

2. Setup a two-variable regression model (i.e. write down the PRF) to examine the impact of the price of public transportation on real per capita gasoline expenditures. = + + a. Based off your knowledge of microeconomic theory, what are your expectations about the sign of ? Why? Microeconomic theory tells us that public transportation is a substitute for the use of automobiles, and therefore gasoline. In other words, as the price of public transportation decreases we would expect the demand for gasoline to decrease because people would prefer the now relatively cheaper public transportation. Therefore, we would expect the sign of in this regression to be positive. b. Estimate the model. Display your regression results.

Model 4: OLS, using observations 1953-2004 (T = 52) Dependent variable: RealGasCap Coefficient Std. Error 3.80033e-06 1.36103e-07 1.27004e-08 1.20839e-09 4.94e-06 1.78e-11 0.688403 110.4635 672.4577 -1337.013 0.926989 t-ratio 27.9225 10.5102 p-value <0.00001 <0.00001

const PPT Mean dependent var Sum squared resid R-squared F(1, 50) Log-likelihood Schwarz criterion rho

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S.D. dependent var S.E. of regression Adjusted R-squared P-value(F) Akaike criterion Hannan-Quinn Durbin-Watson

1.06e-06 5.97e-07 0.682171 2.93e-14 -1340.915 -1339.419 0.065046

c. Is statistically significant? How do you know? As in question #1, I am assuming a two-tailed test (i.e. : = 0; : 0) and 50 degrees of freedom (n-2), and a significance level of 5% (=0.05), therefore the critical t value is again 2.021. Since the calculated t-stat = 10.5102 is greater than this critical value we can REJECT the null in favor of the alternative that is different than zero. So again, YES, is statistically significant. Again, alternatively we could simply look at the reported p-value for the coefficient which tells us the lowest level of significance () at which we could still reject the null hypothesis. Since it is <0.00001 we know that is significantly different than zero. d. Comment on the sign of . Does this align with your expectations? Provide an interpretation of the slope coefficient . The estimated PPT coefficient is positive. Again this does align with our expectation of gasoline and public transportation as substitutes. The estimated coefficient of 1.27 10 means that a one unit increase in the public transportation price index will lead to a 12.7 dollar increase in real per capita gasoline expenditures.