Q4 Imagine that you have estimated the following cost model

Q4. Imagine that you have estimated the following cost model for your firm: Dependent variable: Truck production Lny-? + ? w In wages + ?\' In taxes + ßR In Re n1+ ? cin CPI + ? M 1n materials Lry = ?-0.15W?0.0023 T_ 0.0 14R-0.0052 CPI-0.0010 M (0.0033) (0.0013) (0.0027) (0.0040) (0.0033) Observations: 101 R-Squared 0.60 Adj. R-squared: 0.58 F-Stat: 28.53 (Standard errors in parenthesis) (a) Are wages and taxes significant? Why? (2 Points) (b) Comment on the joint-hypothesis test? (2 Points) (c) What does the R-Squared mean? (3 Points) (d) Explain the impact of taxes and cost of materials on production (3 Points)

Solution

a) for wages we need to set up hypothesis.

H0: Bw= 0

H1:Bw is not 0.

z= Bw/standard error

= 0.15/0.0033= 45.45

Critical z value at 5% level of significance is 1.96 which is less than calculated z value. Thus we reject H0 amd conclude that wages is significant.

Now for taxes

H0: Bt= 0

H1: Bt is not 0

z= 0.0023/0.0013= 1.76

Now, calculated z value is less than 1.96. this means we fail to reject H0 and conclude taxes are insignificant.

b) for joint hypothesis we use F stat.

F stat is 28.53 which is quite a big number. This makes variables jointly significant.

c) R square is 0.60 which means only 60% of the variation in the data is explained by the model. Goodness of the fit of the model is 60%.

d) Taxes have negative effect on truck production. If taxes increase by 1 unit truck production decreases by 15%.

Cost of materials also has negative effect on truck production. If cost of materials increases by 1% trucj production decreases by 0.0010%.