The chicken demand in the Spain, 1960–1982.To study the per capita consumption o

Question

The chicken demand in the Spain, 1960–1982.To study the per capita consumption of chicken in the Spain, you are given the data,

Now consider the following demand functions:

From microeconomic theory it is known that the demand for a commodity generally depends on the real income of the consumer, the real price of the commodity, and the real prices of competing or complementary commodities. In view of these considerations, answer the following questions.

a) Which demand function among the ones given here would you choose, and why?

b) How would you interpret the coefficients of ln X2t and ln X3t in these models?

c) What is the difference between specifications (2) and (4)?

d) What problems do you foresee if you adopt specification (4)? (Hint: Prices of both pork and beef are included along with the price of chicken.)

e) Since specification (5) includes the composite price of beef and pork, would you prefer the demand function (5) to the function (4)? Why?

Y = per capita consumption of chickens, 11 X2real disposable income per capita, = real retail price of chicken per lb. x, = real retail price of pork per lb, real retail price of beef per lb compositereal price of chicken substitutes per lb. which a weighted average of the real retail prices per lb of pork and beef, the weights being the relative consumptions of beef and pork in total beef and pork consumption

Explanation / Answer

a) For the model we first look at the p value

At 95% significance level p<0.05 should be considered

We go for model 2

b)

A one unit increase in X2 and X3 will increase lnY by coefficients of X2 and X3 multiplied by lnX2 and lnX3 respectively

c)

The difference is that in (4) we have ln X5 factor which is not present in (2)

Also the coefficients are different in the 2 models

d)

If we consider (4) we see that the p value is 0.15 which is greater than 0.05 hence is not significant

e)

A composite price will be equal to adding a variable which will have multicollinearity

This would mean that the results will not be accurate and the multicollinearity will affect the model and the model will be insignificant

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