Evaluate the estimated demand model. - Economics questions

Guidelines for the Final Project

Goals

The project is meant to complement and reinforce the key concepts from the course lectures,

reading assignments, and examinations.

The research paper will demonstrate an understanding of supply and demand equilibrium,

various price elasticities, and elementary time-series analysis. To accomplish these tasks each

group should understand and complete the following steps.

1. Choose a good or service. Examples might include, beef, pork, automobile model, et

cetera.

a. Collect minimum 30 data points with a regular frequency. Annual data are often

the easiest to collect and analyze.

b. These data are the quantity of the good sold. For example, beef consumption or

number of Camry’s sold.

c. This is the left hand (independent variable) for your estimated extended demand

equation.

2. Gather the right hand (independent variables) data.

a. Collect the (average) price for the good or service; i.e. the price of beef per pound

or the sticker price of a Camry.

b. Collect the average income for consumers of the product.

c. Collect the price of at least one (more is better) of a related good(s).

d. Collect any other ‘data’ that your group thinks will ‘explain’ the demand for the

good or service.

Once the data are collected make sure that the variables are complete, and all span the same

time frame; i.e. try to avoid missing values. With an appropriate dataset begin by estimating

the extended demand equation. To do this please see the course notes and examples on

Blackboard. Also, please feel free to discuss with Professor Nguyen or Mr. Clancy.

3. Evaluate the estimated demand model.

a. What is the R2? Is it above 90%? 80%?

i. Explain what the R2 means; i.e. how much of the variation in the quantity

demanded does the model explain?

b. What is the p-level associated with the model’s F-statistic? Is it less than 5%?

10%? What does the significance indicate about the model?

c. Inspect the p-levels for all the independent variables. Are they less than 5%?

10%? Interpret the p-levels and explain which variables are statistically

significant.

d. Omit any insignificant variables and re-run the model.

i. Make sure your model has at least the independent variables including, the

good’s own price, the price of a related good, and income.

e. Re-evaluate steps a) – e) with the (new) model and any subsequent results.

4. Check the signs for the independent variables to determine:

a. Does the Law of Demand hold for the model?

b. What is the sign for income? What does the sign signify?

c. What is the sign for the related good’s price? Positive, negative, or zero? Explain

what this means about the relationship between the goods.

5. Compute three elasticities using the arc price formula for elasticity.

a. The (own good) price elasticity of demand. Interpret.

b. The income elasticity of demand. Interpret.

c. The cross-price elasticity of demand. Interpret.

6. Write the report and follow the style and guidelines provided in the sample paper found

on Blackboard.

7. Turn in one printed (hard) copy, per group, to Professor Nguyen by the deadline.

Tip

Experience has shown that collecting the data early is the best way to ensure success. If your

group is having difficulty collecting a dataset, then please see Professor Nguyen or Mr.

Clancy as soon as possible. We are here to help.