Question No 02: [06 Marks]

A study of cigarette demand resulted in the following regression equation:

= . . . + . .

(-2.07) (-1.05) (4.48) (-5.2)

Here, Q denotes annual cigarette consumption; P is the average price of cigarettes, Y is per

capita income, A is total spending on cigarette advertising, and W is a dummy variable whose

value is 1 for years after 1963 (when the American Cancer Society linked smoking to lung

cancer) and 0 for earlier years. The t-statistic for each coefficient is shown in parentheses. The

of the equation is 0.94.

(a) Which of the explanatory variables have real effects on cigarette consumption?

Explain.

(b) What does the coefficient of P represent? If cigarette prices increase by 1 percent,

how will this affect consumption?

(c) Are cigarette purchases sensitive to income? Explain