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Urban Economics
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Problem Set #5
Question 1
Assume you run regression where you explain vineyard land profits as a function of temperature, rainfall and a time trend. The table below reports the results of two different models. The dependent variable is the natural logarithm of profits.
| Equation 1
Ln(profit) |
Equation 2
Ln(profit) |
|
| Temperature
(in degree Celsius) |
0.402 (6.62) | 0.302 (6.99) |
| (Temperature)2
(in degree Celsius) |
-0.009 (4.09) | |
| Rainfall Harvest
(in milliliters) |
-0.435 (-2.99) | -0.455 (-3.04) |
| Trend | 0.021 (6.66) | 0.022 (6.36) |
| R2 | 0.88 | 0.86 |
- a) Which of the two equations do you prefer? Why?
- b) Refer to Equation 1 and calculate the profit maximizing temperature. Show your
work.
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