1.

The quarterly data for four different variables for the UK economy: namely, imports (IMP); gross
domestic product (GDP), the consumer price index (CPI); and the producer price index (PPI) are
available. The data is provided with the file, ‘uk_import.xlsx’.
a) Obtain the correlation matrix of the variables and comment on the results.
b) Estimate the following model and interpret the results:
a. log( IMP )   0  1 log( GDP)   2 log( CPI )  u
c) Now estimate the following model and comment on the results.
a. log( IMP )   0  1 log( GDP)   2 log( CPI )   3 log( PPI )  u
d) Did you get any indication of multicollinearity after adding PPI to the model? Justify your
answer.
e) Also clarify whether the addition of the variable PPI is worth enough or not.

2. Consider the data on real consumption expenditure (C), real disposable personal income (Yd), real
wealth (W), and real interest rate (r) for an advanced economy. The raw data are given in file
‘macro_consumption.xlsx’.
Estimate the following model
ln Ct  1   2 ln Ydt   3 ln Wt   4 rt  u t
a) Interpret the result. Are the signs of the regression coefficients matching with the general
expectations?
b) Is there any indication of multicollinearity problem with your estimation? Justify with
reasons.
c) Confirm the multicollinearity with some tests.
d) What are the possible solutions to deal with the multicollinearity? Briefly explain.

3. Consider the data-set, called ‘canteen.csv’ which gives the information about a small canteen
in a big supermarket. The canteen sells eggs and cookies. The canteen owner puts a poster in
front of his store advertising either the fresh farm eggs or delicious chocolate cookies. The
owner is particularly concerned about the sales of his farm’s eggs as it cannot be stores for a
long time. The data for sales of eggs are collected for a period of one month. The following
four variables are used:
Sales – the total number of eggs sold on a particular day
Price Eggs – the price of the eggs on a particular day
Price Cookies – the price of cookies on a particular day
Ad Type – the type of poster used in front of store; 0 – for egg poster, 1 – for cookie poster

a) Measure the own price elasticity of demand for eggs and cross price elasticity of cookies
by applying suitable regression model (Hint: double log model without adding the ‘Ad
Type’ variable)
b) Also check the model assumption with respect to Normality of the error term. Interpret
the results.
c) Now include the variable ‘Ad Type’ in the above double log model and interprest the
regression coefficients.
d) Conduct a test to check whethe the variable ‘Ad Type’ is worth enough to include in the
model.