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d. How would you compute the own-price, cross-price, and income elasticities for the linear model?

e. On the basis of your analysis, which model, if either, would you choose and why?

7.17. Wildcat activity. Wildcats are wells drilled to find and produce oil and/or gas in an improved area or to find a new reservoir in a field previously found to be productive of oil or gas or to extend the limit of a known oil or gas reservoir. Table 7.7 gives data on these variables*:

Y = the number of wildcats drilled X2 = price at the wellhead in the previous period

(in constant dollars, 1972 = 100) X3 = domestic output X4 = GNP constant dollars (1972 = 100) X5 = trend variable, 1948 = 1, 1949 = 2, . .., 1978 = 31

See if the following model fits the data:

Yt = fa1 + fa2 X2t + fa3 lnX3t + fa4 X4t + fas Xst + u a. Can you offer an a priori rationale to this model?

b. Assuming the model is acceptable, estimate the parameters of the model and their standard errors, and obtain R2 and RR2.

c. Comment on your results in view of your prior expectations.

d. What other specification would you suggest to explain wildcat activity? Why?

I am indebted to Raymond Savino for collecting and processing the data.

CHAPTER SEVEN: MULTIPLE REGRESSION ANALYSIS: THE PROBLEM OF ESTIMATION 237

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