Question

The following regression of total annual sales (S) using data of 150 travel agencies in Australia is estimated

log(S)=6.409+0.105LC+0.0843ADV

Where S = total sales measured in thousands of A$; LC = dummy variable that equals 1 for agencies located within 10 kilometres of the CBD and 0 otherwise; and ADV = total annual advertising expenditure in thousands of A$. Based on the estimated model, the total sales of a travel agent located further than 10 kilometres from the CBD will be:

On average, 8.43% lower than the sales of an agent located within 10 kilometres of the CBD.

A$660.50 lower than the sales of an agent located within 10 kilometres of the CBD.

Approximately 10.5% lower than the sales of an agent located within 10 kilometres of the CBD.

Unpredictable due to lack of enough information.

Answer 1

The estimated regression model is

As the travel agent is located further than 10 kilometres from the CBD we have

For a travel agent located within 10 km from CBD, LC = 1 and the total sales is

For a travel agent located further than 10 km from CBD, LC = 0 and the total sales is

S0 is approximately 10% less than S1.

From the available options, the best answer is the following

Based on the estimated model, the total sales of a travel agent located further than 10 kilometres from the CBD will be:

Approximately 10.5% lower than the sales of an agent located within 10 kilometres of the CBD.