Let€™s return to the model of Exercises 3-7 and 5-8 of the auction price of iPods on eBay. In that model, we used datafile IPOD3 to estimate the following equation:

Where:

PRICE_i = the price at which the ith iPod sold on eBay

NEW_i = a dummy variable equal to 1 if the ith iPod was new, 0 otherwise

SCRATCH_i = a dummy variable equal to 1 if the ith iPod had a minor cosmetic defect, 0 otherwise

BIDRS_i = the number of bidders on the ith iPod

The dataset also includes a variable (PERCENT_i) that measures the percentage of customers of the seller of the ith iPod who gave that seller a positive rating for quality and reliability in previous transactions.12 In theory, the higher the rating of a seller, the more a potential bidder would trust that seller, and the more that potential bidder would be willing to bid. If you add PERCENT to the equation, you obtain

a. Use our four specification criteria to decide whether you think PERCENT belongs in the equation. Be specific.

b. Do you think that PERCENT is an accurate measure of the quality and reliability of the seller? Why or why not?

c. (optional) With datafile IPOD3, use Stata, EViews, or your own regression program to estimate the equation with and without PERCENT. What are the RÌ…² figures for the two specifications? Were you correct in your determination (in part a) as to which equation had the higher RÌ…²?

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PRICÈ, 109.24 + 54.99NEW, – 20.44SCRATCH; + 0.73BIDRS; %3D (5.11) -4.00 (5.34) 10.28 (0.59) 1.23 N = 215 PRICÈ, = 82.67+55.42NEW; – 20.95SCRATCH; + 0.63BIDRS; + 0.28PERCENT; (5.12) (5.34) 10.38 (0.59) 1.07 (0.20) -4.10 1.40 N = 215