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'Purchasing power parity: local price divided by price in the United States. "•"Average of New York, Chicago, San Francisco, and Atlanta. ^Dollars per pound. §Dollars per euro.

Source: McDonald's; The Economist, April 21, 2001.

5. Two-Variable Regression: Interval Estimation and Hypothesis Testing

158 PART ONE: SINGLE-EQUATION REGRESSION MODELS

a. If the PPP holds, what values of fa and fa would you expect a priori?

b. Do the regression results support your expectation? What formal test do you use to test your hypothesis?

c. Should the Economist continue to publish the Big Mac Index? Why or

5.17. Refer to the S.A.T. data given in exercise 2.16. Suppose you want to predict the male math (Y) scores on the basis of the female math scores (X) by running the following regression:

a. Estimate the preceding model.

b. From the estimated residuals, find out if the normality assumption can be sustained.

c. Now test the hypothesis that fa = 1, that is, there is a one-to-one correspondence between male and female math scores.

d. Set up the ANOVA table for this problem.

5.18. Repeat the exercise in the preceding problem but let Y and X denote the male and female verbal scores, respectively.

5.19. Table 5.10 gives annual data on the Consumer Price Index (CPI) and the Wholesale Price Index (WPI), also called Producer Price Index (PPI), for the U.S. economy for the period 1960-1999.

a. Plot the CPI on the vertical axis and the WPI on the horizontal axis.

A priori, what kind of relationship do you expect between the two indexes? Why?

why not?

TABLE 5.10 CPI AND WPI, UNITED STATES, 1960-1999

Year CPI WPI

Year

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