Answer to Question #262290 in Economics for Xyz

Question

Suppose you express the Cobb–Douglas model given in Eq. (7.9.1) as follows:

Yi = β1Xβ2

2i Xβ3

3i ui

If you take the log-transform of this model, you will have ln ui as the disturbance

term on the right-hand side.

a. What probabilistic assumptions do you have to make about ln ui to be able to

apply the classical normal linear regression model (CNLRM)? How would you

test this with the data given in Table 7.3?

b. Do the same assumptions apply to ui ? Why or why not?

Answer 1

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