Question: Question 2 (10 marks) A researcher is interested in identifying seasonality in the consumption of ice cream in Italy and in its average relation to

Question 2 (10 marks) A researcher is interested in identifying seasonality in the consumption of ice cream in Italy and in its average relation to temperatures. She/he collects a sample of data on ice cream consumption (C) and a sample of daily temperature observations (temp) for the same time period. Then she/he creates four dummy variables, D1,1, D2,4, D3,1, D4,1,, one for each season of the year. D1, takes value one in Autumn and zero in any other season of the year and the other dummies are defined similarly for the other seasons. Explain why the model C. =a + temp.+ y1D1 + y 2Da +y3D3 + y4D4 + U: suffers from perfect multicollinearity. Write down two different specifications of the model that allow for seasonal effects without causing perfect multicollinearity. Interpret the parameters of both models Page 2 of 5

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