3.You have been given a file (cobb.xls) that has state level data for the manufacturing sector.The data take the form: STATE YEARLABORCAPITALOUTPUT and STATE ranges from 1-50 and YEAR=1982, 1988, and 1996.

a.Construct dummy variables D88=1 if YEAR=1988, 0 otherwise and D96=1 if YEAR=1996, 0 otherwise.

a.Estimate a Cobb-Douglas Production function of the form:

Q=(Al^B1)(K^B2) EXP(B3D88+B4D96+u)

where Q=output, L=labor, K=capital, D88=1 if year=1988 and zero otherwise, and D96=1 if year = 1996 and zero otherwise.

b.Do your estimates indicate increasing, constant, or decreasing returns to scale?Explain.

c.Write down the null hypothesis that assumes constant returns to scale.

d.Use an F-test to test the null hypothesis of constant returns to scale.Identify the critical F, the calculated F and whether you reject or do not reject the null.

e.Interpret the coefficients B3 and B4 .How does the production function shift from year to year?Use an F-test to test whetherB3 and B4 are simultaneously equal to zero.What exactly are you testing with this?