Michael Lovell estimated the following model of the gasoline mileage of various
ID: 1142683 • Letter: M
Question
Michael Lovell estimated the following model of the gasoline mileage of various models of cars
(standard errors in parentheses):2
Gˆi = 22.008 0.002 × Wi 2.76 × Ai + 3.28 × Di + 0.415 × Ei
(0.0012) (0.71) (1.41) (0.097)
where:
Gi = the miles per gallon of the ith model as reported by Consumers’ Union based on actual
road tests
Wi = the gross weight (in pounds) of the ith model
Ai = a dummy variable equal to 1 if the ith model has an automatic transmission and 0
otherwise
Di = a dummy variable equal to 1 if the ith model has diesel engine and 0 otherwise
Ei = the U.S. Environmental Protection Agency’s estimate of the miles per gallon of the ith
model
a) Suppose that the EPA had built a model that completely captured the effects of weight, engine
type and transmission type on the actual gas mileage of these cars. What would you expect for the
coefficients on Wi, Ai and Di?
b) Under the same ideal model, what should be the coefficients for the intercept and the slope
coefficient on Ei?
c) What would you expect for the sign on the coefficient for Wi if Ei were not included? What does
the coefficient on Wi mean when Ei is included?
d) Carefully interpret the meanings of the estimated coefficients of Ai and Di while Ei is in the
equation.
e) If you were to fit this model again, which variables would you keep and which would you omit? Be
sure to consider the statistical significance of each coefficient.
,” American Economic
Explanation / Answer
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