Q2

Read the Jupiter Electronics case study in Chapter 19 and provide responses to the following questions:

There are three basic features that should be incorporated into a theoretical framework: a. Provide a brief discussion of these features.

b. Assess the quality of the theoretical framework developed in the report. Please include the three basic features in your discussion.

2. One of the characteristics of cause-and-effect relationships is that one "controls for the effects of other variables".

a. What does controlling for the effects of other variables mean?

b. Why is it important to control for the effects of other variables?

c. ?

e. Do the researchers in this case study mentioned above control for the effects of other variables?

3. The researchers ask the people who leave the shop with a plastic bag from the shop to fill out a questionnaire.

a. Is this an example of probability or non-probability sampling?

b. How do you feel about the sampling method that has been employed in this study? (make sure you include the appropriate and theory-based language in your response)

4. Table 3.1 in the Jupiter Electronics case study in Chapter 19 provides an overview of the outcome of Cronbach's alpha's assessment in the study.

a. What is the purpose of calculating Cronbach's alpha?

b. Discuss Cronbach's alpha outcomes in Table 3.1.

5. The researchers tested their hypotheses using regression analysis. How are statistical tests related to the questionnaire that has been used in the case mentioned in Chapter 19?

6. The researchers in the case mentioned above indicated a few weak points of their study. Provide and discuss at least two additional weak points of the study. Provide recommendations for improvement.

A. A consumer chooses between two goods, x1 and x2, with prices p1 and p2 given income y, so as to maximize utility. 1. Graph the consumer's problem in x1 and x2 space. Show the consumer's optimal choice. 2. Give a graphical decomposition of the income and substitution effects of a change in p1 on the demand for x1. B. Assume the consumer's utility function is given by: u(x1, x2) = ln(x1 - 1) + (1-)ln(x2 - 2), where: 0 < < 1, x1 > 1 > 0, x2 > 2 > 0. (This is called a Stone-Geary utility function. The parameters 1 and 2 are sometimes thought of as "subsistence" levels of consumption, below which utility is not defined.) 1. What is the marginal rate of substitution (MRS) for this utility function? 2. Present the first-order conditions for optimal choices of x1 and x2 as a single equation involving the MRS. What is the graphical interpretation of this condition? 3. Derive the uncompensated ("Marshallian") demand function for x1 for this consumer as a function of prices and income. 4. Derive the compensated ("Hicksian") demand function for x1 for this consumer as a function of p1, p2 and a fixed level of utility, u* . Derive the same relationship graphically. What is the connection between the compensated demand function and the substitution effects of question A.2? C. Applied researchers often work with the Cobb-Douglas production function: Q = L K ; > 0, > 0, > 0, where L is Labor, K is capital, and Q is the quantity of output. 1. What must be true for this production function to exhibit constant returns to scale? 2. Econometricians have estimated and by fitting the following equation to time series data on measures of output, capital, and labor: LnQt = ln + lnLt + lnKt + t, where t is an error term and t indexes time series observations. (i) Where does this equation come from? (ii) Assuming you have the necessary data, describe two ways to construct a statistical test for constant returns to scale in production. D. Use a graph to explain the relationship between the purchase of insurance and the concept of risk aversion. Why might someone who purchases fire insurance also play the lottery? E. Your uncle gives you a government bond for your Bar Mitzvah that can be given back to the government for 100 dollars in five years. You would rather have cash. How much could you sell the bond for today if the interest rate on FDIC insured savings accounts is fixed at 5 percent (compounded annually)? F. Suppose that the demand for MP3 downloads is a linear function of their price and the annual income of college students. Make up some notation for a demand equation that expresses this model of demand (assume downloads are not free). Use this equation to compute the price-elasticity of demand for MP3 downloads as a function of price and income. G. Do private schools do a better job of preparing students for MIT than public schools? Consider two regressions that address this question, one short and one long. The short regression looks like this: MITGPAi = 0+ 0PRIVATEi + 0i The long regression adds controls for a student's SAT score: MITGPAi = 1 + 1PRIVATEi + 1SATi + 1i (i) Why is the long regression likely to be a better measure of the effect of a private school education on MIT GPA? (ii) Use the omitted variables bias formula to give a precise description of the likely relationship between 0 and 1.

B. Analytical problems The US Congress periodically experiments with schemes designed to reduce child care costs for working parents, especially those with low earnings. 1. Compare and contrast the labor supply implications of the following programs: (i) A "child allowance," i.e., an annual lump-sum tax credit for anyone with children (ii) A "child allowance" for working women with incomes below the poverty line. The credit phases out at higher incomes. (iii) Subsidized daycare-center-provided care for the children of working women (iv) Subsidized daycare-center-provided care for all children Use the model of home production outlined in class, where child care can be purchased or produced at home. Analyze the labor supply consequences of each scheme with a graph. Assume that women who work in the market must obtain child care from day care centers while they are on the job. 2. Recent years have seen a large increase in the number of welfare recipients (primarily unmarried women with children) entering the labor market. But some social critics believe that mother-provided child care is better for child development than day care provided outside the home. Which policy of the four specified in question 1 seems likely to reduce home production of child care the least? Justify your answer with a graph and a clear explanation of the economic assumptions required to nail this down. C. Data Analysis An extract from the March 2008 CPS is posted on the Stellar course web page. This data set contains information on working-age women. The variables included are labor force status, hours/week, age, race, marital status, years of schooling, number of own children under age 6, number of own children under age 18, and family unearned income. 1. Using the information provided with the data, construct dummies for employment status and labor force participation, high school and college graduation status, nonwhite race, non-married status, and number of children 6-18. Report descriptive statistics for all variables in your extract. Check your data for implausible or missing values. 2. Run a regressions of LFP and log(hours/week) on age, age-squared, the race dummy, dummies for high school and college graduation status, number of children under 6, number of children aged 6-18, the non-married dummy, and unearned income. Are the results of this regression roughly consistent with the time-allocation model discussed in class? Why or why not?