Gasoline Demand and the Arab Oil Embargo of 1973. The famous energy crisis of 1973 began in
Question:
Gasoline Demand and the Arab Oil Embargo of 1973. The famous energy crisis of 1973 began in October of that year, when the members of the Organization of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members of OPEC, plus Egypt, Syria and Tunisia) proclaimed an oil embargo on western countries. This was in response to a decision by the Nixon administration to resupply the Israeli military during the Yom Kippur war, a military conflict between Israel and a coalition consisting mainly of Egypt and Syria. The embargo lasted until March 1974. In this problem, you will investigate whether the 1973 energy crisis triggered a lasting effect on US gasoline demand. The file GasData.xlsx on Canvas contains data on gasoline consumption, denote this by G, a gasoline price index (representing an average measure of gas prices, in 1967 dollars), denote it by P, and disposable income (also in 1967 dollars), denote it by Y .
(a) Estimate the parameters of the demand function log(Gt) = β0 + β1 log(Pt) + β2 log(Yt) + Ut , for the provided data, where t = 1960, . . . , 1986 indexes the year.
(b) What is the interpretation of β1? What is the interpretation of β2?
(c) Test the hypothesis that gasoline demand is perfectly price inelastic (i.e., using a 1- tailed test). Write a mathematical expression for the null and alternative hypotheses, compute your test statistic, state its distribution (including degrees of freedom), and state whether the null hypothesis is rejected at the 5% level.
(d) Test the hypothesis that gasoline demand is unitary income elastic. Write a mathematical expression for the null and alternative hypotheses, compute your test statistic, state its distribution (including degrees of freedom), and state whether the null hypothesis is rejected at the 5% level.
(e) Define a new variable, call it P E (for pre-embargo), where P Et is 1 if t < 1973, and 0 otherwise. Now estimate a new gasoline demand function log(Gt) =β0 + β1 log(Pt) + β2 log(Yt) + β3P Et + β4P Et × log(Pt) + β5P Et × log(Yt) + Ut . 12 DANIEL TANNENBAUM
(f) Test the hypothesis that demand for gasoline was unaffected by the Arab Oil Embargo of 1973 using an F-test. Write a mathematical expression for the null and alternative hypotheses, compute your test statistic, state its distribution (including degrees of freedom), and state whether you would reject the null at the 5% significance level.
(g) What is the estimated price elasticity of demand prior to, and after the embargo? What is the estimated income elasticity of demand prior to, and after the embargo?
(h) Did demand become more or less sensitive to changes in price and income after the embargo? Is the change statistically significant? Is it economically significant? Can you come up with a possible explanation for why gasoline demand may have changed?
Management
ISBN: 9780730329534
6th Asia Pacific Edition
Authors: Schermerhorn, John, Davidson, Paul, Factor, Aharon, Woods, Peter, Simon, Alan, McBarron, Ellen