Construction of a 95% confidence interval for the change in demand.
Dependent variable In(Q1 cigarettes 1995)  (Q1 cigarettes 1985)
Regressor

(1)

(2)

(3)

In (P cigarettes l, 1995)  In (P cigarettes l, 1985)

0.94** (0.21)

1.34** (0.23)

1.20** (0.20)

In(Incl, 1995)  In (Inc l, 1985)

0.53 (0.34)

0.43 (0.30)

0.46 (0.31)

Intercept

0.12 (0.07)

0.02 (0.07)

0.05 (0.06)

Instrumental Variables(S)

Sales tax

Cigarette specific tax

Both sales tax and cigarette  specific tax

Firststage Fstatistic

33.70

107.20

88.60

Over identifying restrictions Jtest and pvalue





4.93 (0.026)

This problem refers to the panel data regressions sumarized in Table
a. Suppose that federal government is considering new tax on cigarettes that is estimated to increase the retail price by $0.10 per pack. If the current price per pack is $2.00, use the regression in column(1) to predict the change in demand. Construct a 95% confidence interval for the change in demand.
b. Assume that the United States enters a recession and income falls by 2%. Use the regression in column (1) to predict the change in demand.
c. Recession typically last less than one year. Do you think that the regression in column (1) will provide a reliable answer to the problem in (b)? Why or why not?
d. Suppose that the Fstastistic enters incolumn (1) was 3.6 instead of 33.6. What would the regression gives a reliable answer to the problem posted in (a)? Why or why not?