The following model shows the consumption function given:
Ct = AD_{t}^{β}_{2}
Where A and β_{2} are unknown constants and D is disposable income. (a) Show how by taking logarithms of the above equation, a linear equation may be obtained.
(b) interpret β. The estimated model is given by:
log C_{t} = 55.78 + 0.764 log D_{t}
R^{2} = 0.89, values in brackets represent t-ratios.
(c ) Interpret the above results
(d) What the reasons behind the existence of multicollinearity and comment on the measures that can be used to deal with such a problem?
(e) What are the assumptions underlying the Classical Linear Regression Model?