Buiding A Model of the Demand for Water in Los Angeles

Instruction:

1. Your goal is to build a model of the demand for water in Los Angeles County as a function of population, rainfall and other variables.

2. Carefully take into consideration issues like specification bias, multicolinearity, autocorrelation, or heteroskadasticity in the modeling.

3. Give out estimation results of the final model you chose and your explanation of the model in Word file.

4. Send the file to me as attachment in email by Dec. 16th.

Data Description:

W - Consumption of water in Los Angeles county in year t (hundreds of millions of gallons)
POP - Population in Glendale, CA in year t (thousands of people)
T - Average annual temperature at the Los Angeles civic center in year t (degrees F)
R - Inches of rainfall at the Los Angeles civic center in year t.
P - average price of a gallon of water in Los Angeles in year t. (dollars)
CO - A dummy variable to measure the conservation efforts undertaken in the last two years in the sample, when there was a
severe drought in Northern California (the source of much of L.A.'s water) even though no such drought took place in
Southern California.
Y- Total personal income for LA county in year t (in billions of dollars)

Note:

1. Population data for LA county were unavailable for the entire sample when the data were collected, so population in Glendale
was used as a proxy.

2. Conservation efforts took place only during the last two years in the sample, so if conservation efforts have an effect but with a lag,
we'd be forced to use a "one-time dummy".

3. Thus there are reasons to be concerned that population and conservation are not accurately measured in the sample.