Question 2 Consider a model for whether a person has ever smoked. Let P-Pr(Y1) b

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Question 2 Consider a model for whether a person has ever smoked. Let P-Pr(Y1) be the probability that a person has ever smoked and assume the logit model is given byv log [P/( 1-P)]-?( 1-X) + ?? where I-P is Pr(Y= 0) (never smoked) and X is a dummy variable that is l if the person is female and zero if male (i)If your prior expectations are that males are more likely to smoke than females and that both males and females have a less than 50% chance of ever smoking what would you expect about the values of ? and ?? Suppose you have a sample of 100 people comprising 40 males and 60 females Of these 15 males and 15 females have ever smoked. Write down the likelihood function for this sample and interpret its meaning. Verify that the maximum likelihood estimates for this problem are given by: (ii) ?-In(3 / 5) =?0.5108: ?=ln(1/3)=-1.0986. (iv) What restriction on ? and ? is required under the null hypothesis of no gender difference in the probability of smoking? Test this null hypothesis using the likelihood ratio (LR) test.

Explanation / Answer

The Say's law - supply creates its own demand - means that any commodity which is supplied in an economy will automatically find consumers and will thus be demanded at one point or the other and hence there will be no excess supply (unplanned inventories) in the economy. Thus the economy will always be in a market equilibrium.

However, real-life market economies are far from Say's law. Any commodity which is supplied is not necessarily demanded and there are planned/unplanned inventories in any current financial year.

Although there may not be an anti-Say's law, but J.M.Keynes refuted this doctrine in his "The General Theory of Employment, Interest and Money" (1936). A proper anti-Says law (interpreting Keynes' explanation) would be "Effective demand creates its own supply".

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