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The following model shows the consumption function given:
Ct = ADtβ2
Where A and β2 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 Ct = 55.78 + 0.764 log Dt
R2 = 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?
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