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Question 1 (16 marks) How prices affect the demand for cigarettes? This question is extremely important for policy reasons. Smoking cigarettes may cause severe health issues, while selling cigarettes contributes taxes to the government tax revenue. Economists at Johns Hopkins collected quarterly data on sales and prices of cigarettes from Argentina including periods from 1985Q1 to 2001Q2, with a total of 66 observations. Industry sales are measured in millions of packs per quarter, and prices are the final price per pack (average over brands) in US dollars. The model they are considering is: Qi = Bo + B.P. + u = a. (4 marks) Suppose Q indicates the sales and P indicates the selling prices, explain what the term u represents. b. (4 marks) The estimated parameters are: B. = 548.2167,ßı = -48.3122. Interpret the value of the slope. Make sure your interpretations account for the unit of data properly. c. (4 marks) If price falls by $0.20, what would be the effect on the sales quantity? d. (4 marks) The linear regression results also report R2 = 0.1882. Is price an important determinant of cigarette sales? Why or why not?