A young researcher estimated UK demand for tourism in Barbados using quarterly d

Question

A young researcher estimated UK demand for tourism in Barbados using quarterly data from 2004Q1 to 2011Q4 and obtained the following results:

log (Tour1) = 10.545 - 1.643log(RP bds,t) +1.412log(RPSET,t ) + 0.545log(YUK,t )

t: [1.960] [4.567] [2.326] [3.955]

where:

• Tourt is the number of quarterly UK tourist arrivals in to Barbados

• RPBDS is the relative price of tourism in Barbados and RPISEY is the relative price of tourism in Seychelles (another UK tourist destination)

• YUK is the real personal disposable income of UK tourists

• t-statistics are in square brackets under each parameter estimate

PLEASE SHOW ALL WORKING USED

(a) Evaluate the statistical significance of RPBDS, RPISEY and YUK. Carefully interpret the results. Be sure to write the null and alternative hypotheses.

(b) Is tourism demand price elastic? Explain your answer.

(c) Can the tourism product in Barbados be considered a normal good? Explain your answer.

(d) Is the tourism product in Seychelles a substitute for the tourism product in Barbados? Explain your answer.

(e) Does the model explain UK demand for tourism in Barbados? Be sure to write the null and alternative hypotheses.

(f) Calculate and interpret R2

Explanation / Answer

Solution:

a)

ho: rpbds =0

h1 : rpbds 0

z = -1.64 / 4,.56 = -0.35

value of z at 5% level of significane = 1.96

h0:rpsey = 0

h1:rpsey 0

z = 1.412/2.326 = 0.60

ho: yuk = 0

h1 :yuk 0

z = 0.545 / 3.955 =0.13

since for all caculated value is less than table value , we will not reject the null hypothesis.

Hence the variables are not statistically significant

b)

As relative price of tourism in barbados increasesby 1% , average tourism goes down by -1.643 % , keeping all other factors constant. % change in price is greater than % change in qty

since coefficient < 1 , demand is price inelastic.

As relative price of tourism in barbados increasesby 1% , average tourism goes down by 1.412 % , keeping all other factors constant.  % change in qty is greater than % change in price.

since coefficient > 1 , demand is price elastic.

c)

Yes tourism in barbados is a normal good.

AS inccome increases by 1% , average tourism goes up by 0.5445 %

since 0.5 lies bewteen 0 and 1 , it is a noral good

d)

Yes , tourism in barbados is a substitute for tourism in seychelles because as price of tourism in sey rises , average tourism rises.

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