Question 3

QUESTION 3 Questions 3-6 require information from the following table. TABLE 12.1 Two Stage Least Squares Estimates of the Demand for Cigarettes Using Panel Data for 48 U.S. States Dependent variable: In(off,,;ttes) - In(Qf1985* Regressor (1) (2) (3) In(pcigarettes) - In( pcigarettes) -0.94** -1.34** -1.20** (0.21) (0.23) (0.20) In(Inc;,1995) - In(Inc;,1985) 0.53 0.43 0.46 (0.34) (0.30) (0.31) Intercept -0.12 -0.02 -0.05 (0.07) (0.07) (0.06) Both sales tax and Instrumental variable(s) Sales tax Cigarette-specific tax cigarette-specific tax First-stage F-statistic 33.70 107.20 88.60 Overidentifying restrictions 4.93 J-test and p-value (0.026) These regressions were estimated using data for 48 U.S. states (48 observations on the 10-year differences). The data are described in Appendix 12.1. The J-test of overidentifying restrictions is described in Key Concept 12.6 (its p-value is given in parentheses), and the first-stage F-statistic is described in Key Concept 12.5. Individual coefficients are statistically significant at the *5% significance level or *$1% significance level. Suppose that the Federal Government is considering a new tax on cigarettes that is estimated to increase the retail price by $0.25 per pack. If the current price per pack is $6.75, use the regression in column (2) to predict the change in demand. What is the (approximate) predicted percentage change in the quantity of cigarettes? Report your answer as a percentage to two decimal places without a percentage sign