How do you know? [4 marks] Question 3 (25 marks) a) Sara and Alfred estimated the following model: ED, = B1 + B2GDPt - B3EP, + ut (1) where ED, = Energy demand in year , GDP, =GDP in year , and EP = Energy price in year , the objective of the analysis is to study the effect of Energy demand. They transform (1) and estimate ED,/GDP, = B, (1/GDP_) +B2 - B3 (EP/GDP.) + u,/GDP (2) The empirical results based on the data for 1986-2015 were as follows: ED, = 40.15 + 0.451 GDP, + 0.6352 EP Se: (32.11) (0.5432) (0.3245) R2 = 0.992 ED,/GDP = 18.22 (1/GDP;) + 0.789 + 0.3512 (EP,/GDP) Se : (32.14) (1.2343) (0.6654) R2 = 0.91 i) What assumption is made by the authors in the second function and why do they derive the second function? [3 marks] ii) Compare the results of the two regressions(at the 5% level). Has the transformation of the original model improved the results, that is, reduced the estimated standard errors? Why or why not? [8 marks] iii) Can you compare the two R2 values? Why or why not? [4 marks] b) Explain the 5 reasons for variability of disturbance (explain each reason with one example- don't use examples of slides). [ 10 marks]