Essentials of Econometrics, 5th Edition by Damodar
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Solutions Manual for Essentials of Econometrics, 5th Edition by
Damodar Gujarati, Dawn Porter (All Chapters) A+
CHAPTER 1
THE NATURE AND SCOPE OF ECONOMETRICS
QUESTIONS
1.1. (a) Other things remaining the same, the higher the tax rate is, the lower the price of a
house will be.
(b) Assume that the data are cross-sectional, involving several residential communities with
differing tax rates.
(c)
where Y = price of the house and X = tax rate
(d)
(e) Given the sample, one can use OLS to estimate the parameters of the model.
(f) Aside from the tax rate, other factors that affect house prices are mortgage interest rates,
house size, buyers’ family income, the state of the economy, the local crime rate, etc. Such
variables may be included in a more detailed multiple regression model.
(g)
(h) The estimated regression can be used to predict the average price of a house in a
community, given the tax rate in that community. Of course, it is assumed that all other factors
stay the same.
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1.2. Econometricians are now routinely employed in government and business to estimate and
/ or forecast (1) price and cost elasticities, (2) production and cost functions, and (3) demand
functions for goods and services, etc. Econometric forecasting is a growth industry.
1.3. The economy will be bolstered if the increase in the money supply leads to a reduction in
the interest rate which will lead to more investment activity and, therefore, to more output and
more employment. If the increase in the money supply, however, leads to inflation, the preceding
result may
not occur. The job of the econometrician will be to develop a model to predict the effect of the
increase in the money supply on inflation, interest rate, employment, etc.
1.4. As a matter of fact, on October 1, 1993 the Federal Government did increase the gasoline
tax by 4 cents. Since gasoline and cars are complementary products, economic theory suggests
that an increase in the price of gasoline will not only lead to a decline in the demand for gasoline
but also in the demand for cars, ceteris paribus. The Ford Motor Companymay be advised to
produce more fuel-efficient cars to stave off a serious decline in the demand for its cars. An
automobile demand function will provide numerical estimates of the effect of gasoline tax on the
demandfor automobiles.
1.5.
There are many alternative designs possible. However, to keep things simple, and discuss just a
basic idea of the design, we could think of using an econometric model known as Autoregressive
Distributed Lag (ARDL) of the form:
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