Suppose You Know the Determining Function for What Drives Restaurant

question 1

Multiple Choice

Suppose you know the determining function for what drives restaurant sales is of the following form WeeklySales_i = β₀ + β₁WeeklyPromoSpend_i + β₂HolidayWeek_i + U_i. Suppose further that your client told you that she is spending $1,000 per week on weekly promotions, except during the summer where she doubles it. Which statement best describes the role of "summer weeks" in estimating the causal effect of weekly promotion spent using the determining function above?

• A) If summer weeks are contained in U_i (i.e., they affect Sales), then there is an endogeneity problem.
• B) If summer weeks leads to more promotion and doesn't affect sales, then there is an endogeneity problem.
• C) There is no potential endogeneity problem with the determining function above.
• D) Because weekly promotions are unrelated to whether or not it's a holiday week, there is no endogeneity problem.

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Definitions:

ATC

Average Total Cost, the sum of all costs divided by the quantity of output produced, a key concept in economics for understanding profitability at different production levels.

Long Run

A period of time in economics during which all factors of production and costs are variable, allowing full industry adjustment.

Output

The overall output of products or services from a business, industry, or national economy.

ATC Curve

Refers to the Average Total Cost curve in economics, which depicts how the total costs per unit of output change as the level of production is altered.