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Now suppose you are told that the true demand function is l n Y t = 1 + 2 l n x 2 t +
Now suppose you are told that the true demand function is
but you think differently and estimate the following demand function:
a Carry out RESET and LM tests of specification errors, assuming the demand function Equation
just given is the truth.
b Suppose widehat in Eq turns out to be statistically insignificant. Does that mean there is no specification
error if we fit Eq to the data?
c If widehat turns out to be insignificant, does that mean one should not introduce the price of a substitute
products as an argument in the demand function?
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