In Hollywood, most nightclubs hire promoters, or people who walk around near the nightclub and try to

In Hollywood, most nightclubs hire €œpromoters,€ or people who walk around near the nightclub and try to convince passersby to enter the club. One of the nightclub owners asked a marketing consultant to estimate the effectiveness of such promoters in terms of their ability to attract patrons to the club. The consultant did some research and found that the main entertainment at the nightclubs was attractive dancers and that the most popular nightclubs were on Hollywood Boulevard or attached to hotels, so he hypothesized the following model of nightclub attendance:

Where:

PEOPLE_i = attendance at the ith nightclub at midnight on Saturday 11/24/07

HOLLY_i = equal to 1 if the ith nightclub is on Hollywood Boulevard, 0 otherwise

PROMO_i = number of promoters working at the ith nightclub that night

HOTEL_i = equal to 1 if the ith nightclub is part of a hotel, 0 otherwise

GOGO_i = number of dancers working at the ith nightclub that night

He then collected data from 25 similarly sized nightclubs on or near Hollywood Boulevard and came up with the following estimates (standard errors in parentheses):

Let€™s work through the classical assumptions to see which assumptions might or might not be met by this model. As we analyze each assumption, make sure that you can state the assumption from memory and that you understand how the following questions help us understand whether the assumption has been met.

a. Assumption I: Is the equation linear with an additive error term? Is there a chance that there€™s an omitted variable or an incorrect functional form?

b. Assumption II: Is there a constant term in the equation?

c. Assumption III: Is there a chance that there€™s an omitted variable or that this equation is part of a simultaneous system?

d. Assumption IV: Is the model estimated with time-series data with the chance that a random event in one time period could affect the regression in subsequent time periods?

e. Assumption V: Is the model estimated with cross-sectional data with dramatic variations in the size of the dependent variable?

f. Assumption VI: Is any independent variable a perfect linear function of any other independent variable?

g. Assume that dancers earn about as much per hour as promoters. If the equation is accurate, should the nightclub owner hire one more promoter or one more dancer if they want to increase attendance? Explain your answer.

Transcribed Image Text:

PEOPLE; = Bo + B;HOLLY; + B,PROMO; + B3HOTEL; + B,GOGO; + e PEOPLE, 162.8 + 47.4HOLLY; + 22.3PROMO; + 214.5HOTEL; + 26.9GOGO; (7.2) (21.7) N = 25 R? = .57 (11.8) (46.0)