Question

log(smoke) =β +β log(VAT_cig) +u i01 i

where smokei are the number of smokers per 100,000 population in country i and V AT _cigi is the VAT on cigarettes in that country.

(a) Interpret the parameter β1.

Answer 1

β1 here is the slope of the given regression line. It is a measure of how sensitive is the number of smokers if the VAT on cigarettes changes.

If the value of β1 is a positive number, then there is a direct relationship between the number of smokers per 100,000 population and the VAT on cigarettes. Means if the VAT increases (or decreases), the number of smokers per 100,000 will also increase (or decrease).

If the value of β1 is a negative number, then there is an inverse relationship between the number of smokers per 100,000 population and the VAT on cigarettes. Means if the VAT increases (or decreases), the number of smokers per 100,000 will also decrease (or increase).