Your Textbook So Far Considered Variables for Cointegration That Are

question 12

Essay

Your textbook so far considered variables for cointegration that are integrated of the same order. For example, the log of consumption and personal disposable income might both be I(1)variables, and the error correction term would be I(0), if consumption and personal disposable income were cointegrated.
(a)Do you think that it makes sense to test for cointegration between two variables if they are integrated of different orders? Explain.
(b)Would your answer change if you have three variables, two of which are I(1)while the third is I(0)? Can you think of an example in this case?

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Definitions:

Marginal Cost

The expenditure involved in creating an additional product unit.

Total Variable Cost

The sum of all costs that vary with the level of output, including costs like raw materials and direct labor.

Average Total Cost

The total cost of production (fixed plus variable costs) divided by the quantity of output, representing the cost per unit including all expenses.

Average Variable Cost

The unit variable cost, determined by dividing the total variable expenses by the amount of output generated.