Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 9

For the population of firms in the chemical industry, let rd denote annual expenditures on research and development, and let sales denote annual sales (both are in millions of dollars).

(i) Write down a model (not an estimated equation) that implies a constant elasticity between rd and sales. Which parameter is the elasticity?

(ii) Now, estimate the model using the data in RDCHEM.RAW. Write out the estimated equation in the usual form. What is the estimated elasticity of rd with respect to sales? Explain in words what this elasticity means.

Step 1 of 3

Consider the provide details and the data RDCHEM.RAW to solve the subparts.

(i)

Consider rd denote the annual expenditures on research and development and sales denote annual sales. Then the constant elasticity model will be a log-log model. Therefore the appropriate model is written as:

Here, is the elasticity of rd with respect to sales and is the error term.