Suppose that youre interested in the effect of price on the demand for a salon haircut and

Suppose that you€™re interested in the effect of price on the demand for a €œsalon€ haircut and that you collect the following data for four U.S. cities for 2003:

and for 2008:

a. Estimate a cross-sectional OLS regression of per capita quantity as a function of average price for 2003. Is the slope positive or negative? Does that meet your expectations?
b. Now estimate a cross-sectional regression on the data for 2008. How is the result different?
c. Now estimate a fixed effects model on the combined data and compare your results with parts a and b.
d. What€™s your conclusion? Which model offers the best approach to answering your question?

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Average Price Per Capita Quantity $75 Location New York Boston Year 2003 2003 2003 2003 2 1 1.5 0.8 $50 Washington, DC Philadelphia $60 $55 Average Price Per Capita Quantity 1.8 1.1 Location Year 2008 2008 New York Boston Washington, DC Philadelphia $85 $48 2008 1.4 $65 2008 $60 0.7