Question: Use the data in AIRFARE.RAW for this exercise. We are interested in estimating the model where 6t means that we allow for different year intercepts.

Use the data in AIRFARE.RAW for this exercise. We are interested in estimating the model

where 6t means that we allow for different year intercepts.
(i) Estimate the above equation by pooled OLS, being sure to include year dummies. If Î”concen = .10, what is the estimated percentage increase in fare"?
(ii) What is the usual OLS 95% confidence interval for Î²1? Why is it probably not reliable? If you have access to a statistical package that computes fully robust standard errors, find the fully robust 95% CI for Î²1. Compare it to the usual CI and comment.
(iii) Describe what is happening with the quadratic in log(dist). In particular, for what value of dist does the relationship between log(fare) and dist become positive?
(iv) Now estimate the equation using random effects. How does the estimate of B1 change?
(v) Now estimate the equation using fixed effects. What is the FE estimate of Î²1? Why is it fairly similar to the RE estimate?
(vi) Name two characteristics of a route (other than distance between stops) that are captured by ai. Might these be correlated with concenit?
(vii) Are you convinced that higher concentration on a route increases airfares? What is your best estimate?

+ .concen

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i The pooled OLS estimate of is about 360 If then which means air fare is estimated to be about 36 higher ii The 95 CI obtained using the usual OLS st... View full answer

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