Econometrics Practice Exercise
The demand for chicken in the United States, 1960-1982. To study the per capita
consumption of chicken in the United States, you are given the data in Table 1.
Where:
Y = per capita consumption of chickens, lbs.
X2 = real disposable income per capita, $
X3 = real retail price of chicken per pound, Cents
X4 = real retail price of pork per pound, Cents
X5 = real retail price of beef per pound, Cents
X6 = composite real price of chicken substitutes per pound, Cents, which is a weighted
average of the real retail prices per pound of pork and beef, the weights being the relative
consumptions of beef and pork in total beef and pork consumption.
Table 1
YEAR Y X2 X3 X4 X5 X6
1960 27.8 397.5 42.2 50.7 78.3 65.8
1961 29.9 413.3 38.1 52 79.2 66.9
1962 29.8 439.2 40.3 54 79.2 67.8
1963 30.8 459.7 39.5 55.3 79.2 69.6
1964 31.2 492.9 37.3 54.7 77.4 68.7
1965 33.3 528.6 38.1 63.7 80.2 73.6
1966 35.6 560.3 39.3 69.8 80.4 76.3
1967 36.4 624.6 37.8 65.9 83.9 77.2
1968 36.7 666.4 38.4 64.5 85.5 78.1
1969 38.4 717.8 40.1 70 93.7 84.7
1970 40.4 768.2 38.6 73.2 106.1 93.3
1971 40.3 843.3 39.8 67.8 104.8 89.7
1972 41.8 911.6 39.7 79.1 114 100.7
1973 40.4 931.1 52.1 95.4 124.1 113.5
1974 40.7 1021.5 48.9 94.2 127.6 115.3
1975 40.1 1165.9 58.3 123.5 142.9 136.7
1976 42.7 1349.6 57.9 129.9 143.6 139.2
1977 44.1 1449.4 56.5 117.6 139.2 132
1978 46.7 1575.5 63.7 130.9 165.5 132.1
1979 50.6 1759.1 61.6 129.8 203.3 154.4
1980 50.1 1994.2 58.9 128 219.6 174.9
1981 51.7 2258.1 66.4 141 221.6 180.8
1982 52.9 2478.7 70.4 168.2 232.6 189.4
1982 52.9 2478.7 70.4 168.2 232.6 189.4
Source: Data on Y are from Citibase and on X2 trough X6 are from the U.S. Department of Agriculture.
Note: the real prices were found by dividing the nominal prices by the Consumer Price Index for food.
Now consider the following demand functions:
ln Yt = 1 + 2 ln X2t + 3 ln X3t + ut (1)
ln Yt = 1 + 2 ln X2t + 3 ln X3t + 4 ln X4t + ut (2)
ln Yt = 1 + 2 ln X2t + 3 ln X3t + 4 ln X5t + ut (3)
ln Yt = 1 + 2 ln X2t + 3 ln X3t + 4 ln X4t + 5 ln X5t + ut (4)
ln Yt = 1 + 2 ln X2t + 3 ln X3t + 4 ln X6t + ut (5)
From microeconomic theory it is known that the demand for a commodity generally
depends on the real income of the consumer, the real price of the commodity, and the real
prices of the competing or complementary commodities. In view of these considerations,
answer the following questions.
*** Before answering the questions from (a) to (h), first get outputs from Shazam
([Link] using data in Excel. Then, highlight the results and use them
when you do each question from (a) to (h). So, When you answer each individual
questions, (a) to (h), I want you to put the appropriate results first before answering the
questions, showing me how to get the answers for each question. ***
a. Which demand function among the ones given here would you choose, and why?
b. How would you interpret the coefficients of ln X2t and ln X3t in these models?
c. What is the difference between specifications (2) and (4)?
d. What problems do you foresee if you adopt specification (4)? (Hint: prices of both
pork and beef are included along with the price of chicken)
e. Since specification (5) includes the composite price of beef and pork, would you
prefer the demand function (5) to the function (4)? Why?
f. Are pork and/or beef competing or substitute products to chicken? How do you
know?
g. Assume function (5) is the “correct” demand function. Estimate the parameters of
this model, obtain their standard errors, and R2, R2, and modified R2. Interpret
your results.
h. Now suppose you run the “incorrect” model (2). Assess the consequences of this
mis-specification by considering the values of 2 and 3 in relation to 2 and 3,
respectively.
