A study of cigarette demand resulted in the following logarithmic regression equation:

Here, Q denotes annual cigarette consumption, P is the average price of cigarettes, Y is per capita income, A is total spending on cigarette advertising, and W is a dummy variable whose value is 1 for years after 1963 (when the American Cancer Society linked smoking to lung cancer) and 0 for earlier years. The t-statistic for each coefficient is shown in parentheses. The R2 of the equation is .94.
a. Which of the explanatory variables have real effects on cigarette consumption? Explain.
b. What does the coefficient of log(P) represent? If cigarette prices increase by 20 percent, how will this affect consumption?
c. Are cigarette purchases sensitive to income?Explain.

Transcribed Image Text:

log(Q)2.55 .29 log(P) 09 log(Y) .08 log(A) - .1W. (-2.07) 0 (4.48) (5.2)