To answer this question, you will have to analyse the dataset TMA02_data_2021J.gdt which can be found in the Assessment section of the module website. The data in this set are derived from a recent sample of data of companies from the AMADEUS database. The firms’ output is measured by the variable ‘Turnover’.
Generate summary statistics for employee numbers, capital used in £1000s and firm turnover. Report and briefly describe the results. (5 marks)
Use a scatterplot and correlation coefficient to assess the linear relationship between log of output and log of capital. Explain your results. (4 marks)
a. Write the linear econometric model that represents a production function in which log of output is a linear function of log of capital. Estimate the coefficients using a simple (univariate) regression OLS model. Explain your results. (3 marks)
b. Explain the meaning of the term elasticity. Use your results to report the elasticity of output with respect to changes in capital. (3 marks)
Extend the model of the production function, that you wrote in your answer to Question 3(a), by adding log of labour into your equation and write down the extended (multivariate) model equation. Estimate its coefficients and explain the results using elasticities. (5 marks)
Compare the results for the two models estimated in Questions 3 and 4 and use them to explain the consequences of omitting relevant variables when using a simple (univariate) regression. (5 marks)
