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Code Name Grade: Jsrodriguezl@unisalle - Edu.co

This document provides instructions for a homework assignment on applying concepts related to dummy variables. Students are asked to answer 14 questions explaining terms like categorical variables and ANOVA models. They are also asked to interpret coefficients in a demand function model for coffee that includes dummy variables for quarters. Students must submit their answers to the professor by a specified deadline.

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Julian Barrios
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50 views3 pages

Code Name Grade: Jsrodriguezl@unisalle - Edu.co

This document provides instructions for a homework assignment on applying concepts related to dummy variables. Students are asked to answer 14 questions explaining terms like categorical variables and ANOVA models. They are also asked to interpret coefficients in a demand function model for coffee that includes dummy variables for quarters. Students must submit their answers to the professor by a specified deadline.

Uploaded by

Julian Barrios
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Code Name Grade

Objective: To apply the concepts of dummy variables

Instructions: Individually answer each of the following questions. All of them are taken
from the main text book for the class. Please refer to the text book, chapter 6 to clarify
concepts and answer the questions, and to the R code provided by the professor. Submit
your answers to the professor before the beginning of the next class (November 6) vía e-
mail at [email protected]

1. Explain briefly the meaning of:


a. Categorical variables.
b. Qualitative variables.
c. Analysis-of-variance (ANOVA) models.
d. The dummy variable trap.
e. Differential intercept dummies.
f. Differential slope dummies
2. Are the following variables quantitative or qualitative?
a. U.S. balance of payments.
b. Political party affiliation.
c. U.S. exports to the Republic of China.
d. Membership in the United Nations.
e. Consumer Price Index (CPI).
f. Education.
g. People living in the European Community (EC).
h. Membership in General Agreement on Tariffs and Trade (GATT).
i. Members of the U.S. Congress.
j. Social security recipients.
3. What problems do you foresee in estimating the following model:
𝑌𝑡 = 𝐵0 + 𝐵1 𝐷1𝑡 + 𝐵2 𝐷2𝑡 + 𝐵3 𝐷3𝑡 + 𝐵4 𝐷4𝑡 + 𝑢𝑡
where 𝐷𝑖𝑡 = 1 for observation in quarter 𝑖, 𝑖 = 1, 2, 3, 4, and 𝐷𝑖𝑡 = 0 otherwise
4. Based on quarterly observations for the United States for the period 1961-I through
1977-II, H. C. Huang, J. J. Siegfried, and F. Zardoshty14 estimated the following
demand function for coffee. (The figures in parentheses are t values.)
a. How would you interpret the coefficients of P, I, and P’?
b. Is the demand for coffee price elastic?
c. Are coffee and tea substitute or complementary products?
d. How would you interpret the coefficient of t?
e. What is the trend rate of growth or decline in coffee consumption in the
United States? If there is a decline in coffee consumption, what accounts for
it?
f. What is the income elasticity of demand for coffee?
g. How would you test the hypothesis that the income elasticity of demand for
coffee is not significantly different from 1?
h. What do the dummy variables represent in this case?
i. How do you interpret the dummies in this model?
j. Which of the dummies are statistically significant?
k. Is there a pronounced seasonal pattern in coffee consumption in the United
States? If so, what accounts for it?
l. Which is the benchmark quarter in this example? Would the results change
if we chose another quarter as the base quarter?
m. The preceding model only introduces the differential intercept dummies.
What implicit assumption is made here?
n. Suppose someone contends that this model is misspecified because it
assumes that the slopes of the various variables remain constant between
quarters. How would you rewrite the model to take into account differential
slope dummies?
o. If you had the data, how would you go about reformulating the demand
function for coffee?

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