In this problem set we will decompose a nave comparison of averages into a treatment effect and
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Question:
sales figures.
Assume average sales for advertised wines were $600, whereas non-advertised wines were $800.Assume also that the selection bias in y0 is $300 and the selection bias in y1 is -$400. Complete
the table below and explain your answers. (Note: Half of wines are advertised).
Not Advertised Advertised Total
Sales with advertising $600
Sales without advertising $800
Difference
Consider the regression model Yi = 0 +1Di +Ui and suppose an analyst has sales figures for 100 randomly selected wines, some of which were advertised and some which were not. When the analyst runs the regression, what sign do you expect 1 to have? Explain why correlation is not indicative of causation in this example by comparing the expected value of 1 with the ATE, ATT and ATU of advertising. Suppose that the profit margin is 25% of sales. If the cost of advertising a bottle of wine is $40 per month, should the wine merchant also advertise the 500 wines that have not yet been advertised in the coming month?If the wine merchant only knew the ATE before advertising the wines, would they pay to have all wines advertised in the coming month?
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