There Are at Least Two Different Possible Approaches to the Problem

question 4

Essay

There are at least two different possible approaches to the problem of building a model of the costs of production of electric power.
I: Model I hypothesizes that per-unit costs (C) as a function of the number of kilowatt-hours produced (Q) continually and smoothly falls as production is increased, but it falls at a decreasing rate.
II: Model II hypothesizes that per-unit costs (C) decrease fairly steadily as production (Q) increases, but costs decrease at a much faster rate for hydroelectric plants than for other
kinds of facilities.
Given this information,
(a) What functional form would you recommend for estimating Model I? Be sure to write out a specific equation.
(b) What functional form would you recommend for estimating Model II? Be sure to write out a specific equation.
(c) Would $\overline { \mathrm { R } } ^ { 2 }$ be a reasonable way to compare the overall fits of the two equations? Why or why not?
Note: In the following question, you may want to change the absolute size of the coefficients, depending on the size of your school, but remember to change the size of the standard errors proportionally.

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Definitions:

Japanese Yen

The official currency of Japan, widely used in international finance and trading.

U.S. Dollar

The recognized monetary unit of the United States, extensively employed as a standard in global commerce and financial activities.

British Enterprise

Entities engaged in commercial, industrial, or professional activities within the United Kingdom.

Appreciated

The increased value of an asset or currency over time, often due to market or economic factors.