Question

You are interested in the effect of gasoline prices on consumption of gasoline and estimate the following regression Qi = B0 + B1Pricei + B2Incomei + Ei.

a. What type of economic function have you estimated?

b. What does economic theory tell you about beta hat?

Answer 1

a. The regression function shows a demand function as it shows the effect of prices and income on the consumption of gasoline. Here the Q is the demand for gasoline and prices and income are the endogenous and exogenous factors that effect demand.

b. The beta hats are the coefficients of price and income post the estimation of the regression equation. Here we have B1 is the estimated amount that gasoline demand will change when prices change by 1 unit. The B2 is the estimated amount that gasoline demand will change when income changes by 1 unit.