The Demand for Lamp UK consumption oflanrb: 1 9715-200: 140 130 120 110 100 E a E a 5 so an 70 IO 50 40 30 19741976 19151930 1m 1m 1\" I\" run 1M1\" 1\"!\" 2000 am: 2004 The diagram shows what happened to the consumption of lamb in the UK over the period 19742004. How can we explain this dramatic fall in consumption? One way of exploring this issue is to make use of a regression model, which should help us to see which variables are relevant and how they are likely to affect demand. The following is an initial model tted (using the Microf'rt statistical software package) to annual data for the years 19742004. QL = 170.2 - 0.197Pr. - 0.069Ps + 0.280Pp - 0.0094Y (1) where - QL is the quantity of lamb sold in grams per person per week: . Pr. is the 'real' price of lamb (in pence per kg, 1985 prices); . P3 is the 'real' price of beef {in pence per kg, 1985 prices): 0 Pp is the 'real' price of pork {in pence per kg, 1985 prices): Y is households' real disposable Income per head ( per year, 2002 prices). There is a serious problem with estimated demand functions like these: they assume that other determinants of demand (i.e. those not included in the model) have not changed. In the case of this demand-for-lamb function. one of the other determinants did change. This was tastes- during the 1980s and 1990s there was a shift in demand away from lamb and other meats. partly for health reasons. and partly because of an expansion in theavailability of and demand for vegetarian and low-meat alternatives. On the assumption that this shift in taste took place steadily over time, a new demand equation was estimated for the same years: QL = 148.7 - 0.278PL - 0.030PB + 0.116PP + 0.0062Y - 3.787TIME (2) where TIME = 1 in 1974. 2 in 1975. 3 in 1976, etc. Question 2: (20 points) How does the introduction of the variable TIME affect the relationship between the demand for lamb and (a) its real price; (b) real disposable income per head? Question 3: (25 points) Does lamb now appear to be a normal good or an inferior good? Explain why (30 points) Question 4: (30 points) What does the negative coefficient of Pa indicate? Is model (2) a perfect model? Explain why. (35 points)