2. Now suppose you are told that the true demand function is InY = B1+ BlnX2+...
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2. Now suppose you are told that the true demand function is InY = B1+ BlnX2+ + 3lnX3+ + lnX6 + ut (1) but you think differently and estimate the following demand function: InY = + lnX2+ + 3lnX3+ + ut (2) a) Carry out RESET and LM tests of specification errors, assuming the demand function (1) (Equation 1). just given is the truth. b) Suppose B6 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 B6 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? 2. Now suppose you are told that the true demand function is InY = B1+ BlnX2+ + 3lnX3+ + lnX6 + ut (1) but you think differently and estimate the following demand function: InY = + lnX2+ + 3lnX3+ + ut (2) a) Carry out RESET and LM tests of specification errors, assuming the demand function (1) (Equation 1). just given is the truth. b) Suppose B6 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 B6 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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