To study the relationship between advertising expenditure and sales of cigarettes, Frank Bass used the following model:
Question:
Where
Y1 = logarithm of sales of filter cigarettes (number of cigarettes) divided by population over age 20
Y2 = logarithm of sales of nonfilter cigarettes (number of cigarettes) divided by population over age 20
Y3 = logarithm of advertising dollars for filter cigarettes divided by population over age 20 divided by advertising price index
Y4 = logarithm of advertising dollars for nonfilter cigarettes divided by population over age 20 divided by advertising price index
X1 = logarithm of disposable personal income divided by population over age 20 divided by consumer price index
X2 = logarithm of price per package of nonfilter cigarettes divided by consumer price index
a. In the preceding model the Y€™s are endogenous and the X€™s are exogenous. Why does the author assume X2 to be exogenous?
b. If X2 is treated as an endogenous variable, how would you modify the preceding model?
Step by Step Answer:
a Bass is apparently not concerned with developi...View the full answer
