Suppose that youre interested in the effect of price on the demand for a salon haircut and that you collect the following data for four U.S. cities for 2003:
and for 2008:
a. Estimate a cross-sectional OLS regression of per capita quantity as a function of average price for 2003. Is the slope positive or negative? Does that meet your expectations?
b. Now estimate a cross-sectional regression on the data for 2008. How is the result different?
c. Now estimate a fixed effects model on the combined data and compare your results with parts a and b.
d. Whats your conclusion? Which model offers the best approach to answering your question?
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