Links to Estimation Techniques 

Tim Shaughnessy, Chapter 7 — Demand Estimation and Forecasting, available from

Matt Kermode, Explanation of Regression Results, Available at

Jason Delaney, Introduction to Multiple Regression, Available at

Session Long Project


In 2006 the CEO of Bear Sterns, James Caynes, received a compensation package of $34 million. The following year Bear Sterns cost $2.7 billion to the taxpayers. In 2006, the CEO of  Lehman Brothers received a compensation package of $27 million. On September 15, 2008, Lehman Brothers filed for bankruptcy. The collapse of  Lehman Brothers is seen by many as the key event that sparked the Global Financial Crisis. In 2006, the CEO of Citigroup, Charles Prince, received a compensation package of $25 million. Since then the stock price has fallen from $50 a share to $3.5 a share. The CEO of Countrywide Financial, Angelo Mozilo, did even better. His compensation package was $43 million. Angelo Mozilo and two other top executives were charged by the Security and Exchange Commission (SEC) with fraud. According to the SEC,  from 2005 through 2007, Countrywide Financial engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company’s ability to sell them. Countrywide Financial was the third biggest originator of subprime mortgages and the nation’s leader in subprime mortgage- backed securities. The tragedy is that these individuals did not make decisions that were in their companies’ best interest. Why? What went wrong? What caused the relation between the CEO and the stockholders to go so badly awry? Discuss.


An important component of this course is experience with analyzing economic data at the managerial level. The computer is a perfect tool for manipulating data and performing statistical analyses. While the focus of BUS 530 is not on learning statistics, this course will utilize and improve your computer skills with a computer assignment designed to illustrate the interconnections between data, information and managerial decisions.

The primary software will be Microsoft Excel and the Excel statistical add-in: Data Analysis. Microsoft Excel 2010 (and previous versions) provides a set of data analysis tools calledAnalysis ToolPak which you can use to save steps when you develop complex statistical analyses. You provide the data and parameters for each analysis; the tool uses the appropriate statistical macro functions and then displays the results in an output table. The Analysis ToolPak is a Microsoft Office Excel add-in program that is available when you install Microsoft Office or Excel. To use the Analysis ToolPak in Excel, however, you need to load it first. Click the Microsoft Office Button, and then click Excel Options. Click Add-Ins, and then in the Manage box, select Excel Add-ins. Click Go. In the Add-Ins available box, select the Analysis ToolPak check box, and then click OK. (If Analysis ToolPak is not listed in the Add-Ins available box, click Browse to locate it.) If you get prompted that the Analysis ToolPak is not currently installed on your computer, click Yes to install it. After you load the Analysis ToolPak, the Data Analysis command is available in the Analysis group on theData tab.

In the Module 4 SLP assignment you are also asked to estimate a market demand or a cost function (your choice) using the tools of regression analysis and the regression software outlined above.

The first data set (demand for housing) is used to apply the hedonic approach to demand estimation, while the second data set (demand for cigarettes) is used to apply the classical approach. Finally, the  third dataset (cost of electricity) uses a well known dataset to estimate  the cost of electricity production. In all cases the data is cross-sectional data.

The estimation of demand follows two approaches:

  • the classical approach, whereby the quantity demanded of a product is explained by its own price, the prices of related goods (complements and substitutes), income, tastes and preferences, and the size of the population, among others;
  • the hedonic approach, whereby the price of an asset (car, house) is explained by the characteristics of the asset itself (i.e., the price of housing depends on the number of bedrooms, the number of bathroom, the view from the house (using a dummy variable: 1 = view, 0 = no view), the square footage of the house, the square footage of the lot, etc).

PART 2: Assignment

You are given the data on housing. The data are collected from the real estate pages of theBoston Globe during 1990.  These are homes that sold in the Boston, MA area. The source of the data is Wooldridge (2009) Introductory Econometrics: A Modern Approach, 4th Edition, Cengage


1. price                    price, in dollars

2. assess                  assessed value, in dollars

3. bdrms                  number of bedrooms

4. lotsize                 size of lot, square feet

5. sqrft                    size of house, square feet

Cut and paste in Excel the data set. Then, in Excel, obtain the logarithmic transformation of the following variables using the Excel function =LOG( . )

6. lprice                   log(price) : dependent variable

7. lassess                 log(assess) : independent variable

8. llotsize                 log(lotsize) : independent variable

9. lsqrft                    log(sqrft) : independent variable

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