Answer Happy

QUESTION ONE I. Mr Dalu analysed the factors that affect industrial output in a hypothetical country Zed for a period 2000 to 2019. He obtained the following results: = Ot = 0.2 + 0.02W4 + 0.01M+ +0.01M4-1 - 0.2r4 + 0.01Qt-1 t = = (2.2) (2.2) (1.02) (-2.01) (5.33) (-8.88) R2 = 0.88 d = 1.1 where Q = monthly output at factor cost; W = monthly wages and salaries per employee; r = interest rate; M = import prices. At 5% level of significance, the Durbin Watson d lower and upper limits are 0.91 and 1.99, respectively. Would you conclude that the model suffers from serial correlation? Explain [3 marks] II. Suppose that the true consumption function for a certain district Y; = Bo + B1X1 + B2X2 + B3X3 + Uị. Where Y= total consumption; X;: income of rural areas; X2: income of urban areas; Xz: income tax You establish that, a priori, the marginal propensity to consume is equally distributed between the urban and rural areas. How would you use the a priori information to estimate this model to avoid the problem of multicollinearity between X and X2 [3 marks).