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and
| Year | Cigarettes Sold per Person Over Age 15 | Retail Price of Cigarettes | Real Advertising per Person Over Age 15 | Advertising Price Index | Degree of Monopoly | Disposable Personal Income in 1958 dollars |
| 1955 | 3163.090 | 93.9693 | 0.96100 | 95.4775 | 18.595 | 1659 |
| 1956 | 3230.517 | 94.7049 | 1.09969 | 94.3800 | 19.207 | 1673 |
| 1957 | 3313.033 | 94.2535 | 1.22180 | 96.2125 | 20.165 | 1683 |
| 1958 | 3479.063 | 94.7712 | 1.40471 | 97.8300 | 21.736 | 1666 |
| 1959 | 3584.930 | 98.1779 | 1.45816 | 98.2800 | 22.042 | 1735 |
| 1960 | 3676.912 | 100.0000 | 1.37863 | 100.0000 | 22.04 | 1749 |
| 1961 | 3743.354 | 99.8677 | 1.31871 | 102.0400 | 22.465 | 1756 |
| 1962 | 3733.504 | 99.6761 | 1.35467 | 102.9725 | 22.226 | 1814 |
| 1963 | 3775.886 | 101.3630 | 1.51345 | 103.9525 | 22.848 | 1867 |
| 1964 | 3648.211 | 102.3110 | 1.73665 | 103.4775 | 23.168 | 1948 |
| 1965 | 3710.075 | 105.7510 | 1.59761 | 103.7225 | 23.598 | 2047 |
| 1966 | 3689.386 | 108.0450 | 1.71062 | 104.2200 | 25.085 | 2127 |
| 1967 | 3652.016 | 109.2490 | 1.71444 | 104.6125 | 26.310 | 2164 |
Answer the following six questions:
a) Which variables in the model are exogenous and which are endogenous?
b) Check and see if equations (18) and (19) are underidentified, exactly identified, or overidentified.
c) Estimate equations (21) and (22) using ordinary least squares.
d) Estimate equations (21) and (22) using two-stage least squares. Present the results in a table that for comparison reasons includes the results from the OLS estimation. Be sure to include the R 2 and the Durbin-Watson statistic.
e) Which side of the advertising-sales controversy do your results appear to support?
f) How well-specified does your model appear to be? Why?
Exercise 2. Demand and supply of commercial loans. We are interested in estimating the demand for commercial loans by business firms and the supply of commercial loans by banks. We have available in Table 6 monthly data from the U. S. commercial loan market for the period from January, 1979 through December, 1984 and available in the MS Excel file Exercise 2.xls . The model and data for this problem first appeared in Maddala, G. S. (1988) Introductory Econometrics (New York: Macmillan Publishing Company): 331-317. Define:
Q t = total commercial loans (billions of dollars)
R t = average prime rate charged by banks
RS t = 3-month Treasury bill rate (represents an alternative rate of return for banks)
RD t = Aaa corporate bond rate (represents the price of alternative financing to firms)
X t = industrial production index (represents firms’ expectation about future economic activity)
y t = total bank deposits (billions of dollars) (represents a scale variable).
The demand and supply equations to be estimated, respectively, are as follows:
and
Questions
a) What are the endogenous and exogenous variables in this model?
b) Solve for the two “reduced form” equations of this model. Estimate these two equations using the data in Table 6.
c) Check the “order” condition for identification of each equation of the model.
d) Estimate equations (23) and (24) using ordinary least squares using the data in Table 6.
e) Estimate equations (23) and (24) using two-stage least squares. Report the results of the estimations for part 4 and 5 in a single table. Be sure to include the t-ratios, R 2 ’s, and Durbin-Watson statistics for each of the equations estimated.
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