Your Textbook Specifies a Simple Regression Problem for Two Time

question 29

Essay

Your textbook specifies a simple regression problem for two time periods for the years 1982 and 1988 as follows:
FatalityRate_i,1982 = β₀ + β₁BeerTax_i,1982 + u_i,1982
FatalityRate_i,1988 = β₀ + β₁BeerTax_i,1988 + u_i,1988
After subtracting the first equation from the second equation, the authors estimate the model and find a negative intercept.
a. Show how you would have to modify the two equations to allow for the presence of an intercept in the differenced model.
b. What would the relative magnitude of the modified model have to be for you to find a negative intercept?

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