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

Exercise 6

The variable rdintens is expenditures on research and development (R&D) as a percentage of sales. Sales are measured in millions of dollars. The variable profmarg is profits as a percentage of sales.

Using the data in RDCHEM.RAW for 32 firms in the chemical industry, the following equation is estimated:

(i) Interpret the coefficient on log(sales). In particular, if sales increases by 10%, what is the estimated percentage point change in rdintens? Is this an economically large effect?

(ii) Test the hypothesis that R&D intensity does not change with sales against the alternative that it does increase with sales. Do the test at the 5% and 10% levels.

(iii) Interpret the coefficient on profmarg. Is it economically large?

(iv) Does profmarg have a statistically significant effect on rdintens?

Step 1 of 4

(i)

The estimated equation is as follows:

If sales increases by 10%, then expenditure on research and development would increase by (0.321 X 10 / 100) = 0.03 units.

Thus, this is not an economically large effect.