An Economist Is in the Process of Developing a Model $\left( x _ { 1 } \right)$

question 45

Essay

An economist is in the process of developing a model to predict the price of gold. She believes that the two most important variables are the price of a barrel of oil $\left( x _ { 1 } \right)$ and the interest rate $\left( x _ { 2 } \right)$ She proposes the first-order model with interaction: $y = \beta _ { 0 } + \beta _ { 1 } x _ { 1 } + \beta _ { 2 } x _ { 2 } + \beta _ { 3 } x _ { 1 } x _ { 3 } + \varepsilon$ .
A random sample of 20 daily observations was taken. The computer output is shown below.
THE REGRESSION EQUATION IS $y =$ $115.6 + 22.3 x _ { 1 } + 14.7 x _ { 2 } - 1.36 x _ { 1 } x _ { 2 }$ . $$\begin{array} { | c | r r c | } \hline \text { Predictor } & \text { Coef } & \text { SiDev } & T \\\hline \text { Constant } & 115.6 & 78.1 & 1.480 \\x _ { 1 } & 22.3 & 7.1 & 3.141 \\x _ { 2 } & 14.7 & 6.3 & 2.333 \\x _ { 1 } x _ { 2 } & - 1.36 & 0.52 & - 2.615 \\\hline\end{array}$$ S = 20.9 R-Sq = 55.4%. $$\begin{array}{l}\text { ANALYSIS OF VARIANCE }\\\begin{array} { | l | r r r c | } \hline \text { Source of Variation } & d f & \text { SS } & \text { MS } & F \\\hline \text { Regression } & 3 & 8661 & 2887.0 & 6.626 \\\text { Error } & 16 & 6971 & 435.7 & \\\hline \text { Total } & 19 & 15632 & & \\\hline\end{array}\end{array}$$ Is there sufficient evidence at the 1% significance level to conclude that the price of a barrel of oil and the price of gold are linearly related?

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Definitions:

Returns to Scale

The rate at which output increases in response to proportional increases in all inputs.

Production Function

An equation or graph that shows the output generated from different combinations of inputs, usually focusing on labor and capital.

Marginal Product

The increase in output that results from an additional unit of input.

Returns to Scale

Refers to the rate at which output increases as inputs are proportionately increased, categorizing into increasing, constant, or decreasing returns.