Use the data for the demand for chicken given in Exercise 7.19. Suppose you are told that

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Use the data for the demand for chicken given in Exercise 7.19. Suppose you are told that the true demand function is

ln Yt = β1 + β2 ln X2t + β3 ln X3t + β6 ln X6t + ut ……………… (1)

but you think differently and estimate the following demand function:

ln Yt = α1 + α2 ln X2t + α3 ln X3t + vt (2)

where

Y = per capita consumption of chickens (lb)

X2 = real disposable per capita income

X3 = real retail price of chickens

X6 = composite real price of chicken substitutes

a. Carry out RESET and LM tests of specification errors, assuming the demand function (1) just given is the truth.

b. Suppose β̂6 in Eq. (1) turns out to be statistically insignificant. Does that mean there is no specification error if we fit Eq. (2) to the data?

c. If β̂6 turns out to be insignificant, does that mean one should not introduce the price of a substitute product(s) as an argument in the demand function?

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Basic Econometrics

ISBN: 978-0073375779

5th edition

Authors: Damodar N. Gujrati, Dawn C. Porter

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