This problem is from Folland (2009), ch3, pp62-63.

ANSWERS ARE GIVEN IN THE WORKSHEET CALLED"ANSWER". Work through the problem b
Consider the following data for a cross section of individuals in the population, which
Q = Quantity (in 100s) of aspirin purchased in a year
P = Average price of aspirinin that year
Y=Annual income
A = Age of Buyer

Observation
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

P
1
2
4
2
2
3
3.5
4
7
1
2
3
3.5
4
2
1
8
9
1
10
6
2
3
3
3
4
1
1
2
3

Y
1.5
1.5
1
1
1
2
1.5
2
1
3
2
2
2
2
3
4
2
1
4
1.5
1.5
1
1
2
2
3
4
4
5
1

A
20
40
12
10
8
30
30
20
20
15
18
20
15
10
25
15
15
40
10
30
35
30
25
20
15
20
20
25
28
30

25
20
25
30
30
35
40
40
45
40
30
32
36
30
20
25
55
50
45
55
60
40
40
35
35
35
25
30
30
32

1. What is the relation

To have a sense of ea
2. Calculate the mult
What is the eslaticity
3. Can you find evide

ugh the problem before looking at the answers!

. What is the relationship in a regression analysis between Q and P? Between Q and Y? Between Q and A? (run
o have a sense of each relationship you may construct a scatter plot.
. Calculate the multiple regression that relates Q with P, Y, and A. Which variables are stastically significant?
What is the eslaticity of Q with respect to P, to Y and /or to A? Calculate the elasticity at the mean value.
. Can you find evidence of non-linearities in Age? What may help explain non-linearities in Age?

Between Q and A? (run simlpe regressions for each case).

stastically significant?
the mean value.
es in Age?

Observatio
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

P
1
2
4
2
2
3
3.5
4
7
1
2
3
3.5
4
2
1
8
9
1
10
6
2
3
3
3
4
1
1
2
3

Y
1.5
1.5
1
1
1
2
1.5
2
1
3
2
2
2
2
3
4
2
1
4
1.5
1.5
1
1
2
2
3
4
4
5
1

A
20
40
12
10
8
30
30
20
20
15
18
20
15
10
25
15
15
40
10
30
35
30
25
20
15
20
20
25
28
30

25
20
25
30
30
35
40
40
45
40
30
32
36
30
20
25
55
50
45
55
60
40
40
35
35
35
25
30
30
32

1. What is the relationsh

To have a sense of each
2. Calculate the multiple
What is the eslaticity of Q
3. Can you find evidenc
Answer to 1:

Q = 5.32 - 0.92P
R2 = 0.189
Q = 1.54 + 0.08Y
R2 = 0.095
Q = -2.80 + 0.17A
R2 = 0.536

Answer to 2:
Q = -1.63 - 0.55P + 0.03Y +
(2.04) (1.0
R2 = 0.620

P and A are significant at

Elasticity at means

Mean P
Mean Y
Mean A
Mean Q
Alternatively, you can transf

3. Construct a new variable

Non-linearities may be expla
SUMMARY OUTPUT - multiple regression
Regression Statistics
Multiple R 0.787134
R Square
0.61958
Adjusted R 0.575685
Standard Er1.560662
Observatio
30

ANOVA
df
Regression
Residual
Total

Intercept
P
Y
A

SS
MS
F
Significance F
3 103.1394 34.379797 14.11516 1.18E-005
26 63.32728 2.4356645
29 166.4667

Coefficients
Standard Error t Stat
P-value Lower 95%Upper 95%
Lower 95.0%
-1.632886 1.467736 -1.1125202 0.276096 -4.649859 1.384088 -4.649859
-0.545531 0.266874 -2.0441506 0.05119
-1.0941 0.003037
-1.0941
0.034701 0.034198 1.0147027 0.319598 -0.035594 0.104995 -0.035594
0.151437 0.030047 5.0400173 3.02E-005 0.089675 0.213199 0.089675

Observatio
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

P
1
2
4
2
2
3
3.5
4
7
1
2
3
3.5
4
2
1
8
9
1
10
6
2
3
3
3
4
1
1

Y
1.5
1.5
1
1
1
2
1.5
2
1
3
2
2
2
2
3
4
2
1
4
1.5
1.5
1
1
2
2
3
4
4

A
20
40
12
10
8
30
30
20
20
15
18
20
15
10
25
15
15
40
10
30
35
30
25
20
15
20
20
25

25
20
25
30
30
35
40
40
45
40
30
32
36
30
20
25
55
50
45
55
60
40
40
35
35
35
25
30

Asq
625
400
625
900
900
1225
1600
1600
2025
1600
900
1024
1296
900
400
625
3025
2500
2025
3025
3600
1600
1600
1225
1225
1225
625
900

SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R
Standard Er
Observatio
ANOVA
Regression
Residual
Total
Coefficients
Intercept
P
Y
A
Asq

29
30

2
3

5
1

28
30

30
32

900
1024

simple regressions

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.434581
R Square 0.188861
Adjusted R 0.159892
Standard Er
2.196
Observatio
30
ANOVA
df
Regression
Residual
Total

Intercept
P

SS
MS
F
Significance F
1 31.43907 31.439071 6.519364 0.016405
28 135.0276 4.8224141
29 166.4667

Coefficients
Standard Error t Stat
P-value Lower 95%Upper 95%
Lower 95.0%
5.321986 0.864405 6.1568198 1.20E-006 3.551333 7.092639 3.551333
-0.923773 0.361795 -2.5533044 0.016405 -1.664876 -0.182669 -1.664876

. What is the relationship in a regression analysis between Q and P? Between Q and Y? Between Q and A? (run
o have a sense of each relationship you may construct a scatter plot.
. Calculate the multiple regression that relates Q with P, Y, and A. Which variables are stastically significant?
What is the eslaticity of Q with respect to P, to Y and /or to A? Calculate the elasticity at the mean value.
. Can you find evidence of non-linearities in Age?

nswer to 1:

Q = 5.32 - 0.92P
R2 = 0.189

Scatter plot Age

Q = 1.54 + 0.08Y
R2 = 0.095

70
60
50

Q = -2.80 + 0.17A
R2 = 0.536

40
Age

30
20

Answer to 2:
Q = -1.63 - 0.55P + 0.03Y + 0.15A
(2.04) (1.01) (5.04)

10
0
0

6
Q

P and A are significant at 5% level; Y is not.

Elasticity at means

Mean

Elasticity

2.11666667 -0.3429826
0.2236648718
21.7
35.6666667 1.604333283
3.36666667
Alternatively, you can transform each of the variables into natural logs and look the estimated coefficients.

. Construct a new variable "Age square", and run a multiple regression. If the estimated coefficient is statistically significant, the
Non-linearities may be explained as follows: as the age goes up people are more likely to consume aspiring more frequently.

Mean
2.116667

Elasticity at Mean
-0.342983

Y
A
Q

21.7
35.66667
3.366667

0.223665
1.604333

Upper 95.0%
1.384088
0.003037
0.104995
0.213199

UMMARY OUTPUT

Regression Statistics
0.81029
0.65657
0.601621
1.512212
30

df

HERE I HAVE CONSTCUTED A NEW VARIABLE Age^2, which I have labeled Asq.
AS it is the regression output does not support the idea that age exhibits non-lin

SS
MS
F
Significance F
4 109.2971 27.32426 11.94877 1.45E-005
25 57.16962 2.286785
29 166.4667

Coefficients
Standard Error t Stat
4.317918 3.895334 1.108484
-0.56837 0.258964 -2.194786
0.016317 0.034979 0.46648
-0.155385 0.189231 -0.821137
0.003966 0.002417 1.640949

P-value Lower 95%Upper 95%

Lower 95.0%
Upper 95.0%
0.278203 -3.704674 12.34051 -3.704674 12.34051
0.037684 -1.101716 -0.035024 -1.101716 -0.035024
0.644911 -0.055723 0.088357 -0.055723 0.088357
0.41933 -0.545114 0.234344 -0.545114 0.234344
0.113331 -0.001012 0.008945 -0.001012 0.008945

Upper 95.0%
7.092639
-0.182669

Between Q and A? (run simlpe regressions for each case).

stastically significant?
the mean value.

atter plot Age and Q

10

12

s statistically significant, then there might evidence of non-linearities.

spiring more frequently.

hich I have labeled Asq.

that age exhibits non-linearities.

per 95.0%