At the Rutgers Public Finance Institute Mr. Smith is interested in estimating the elasticity of demand for cigarettes.
They have a annual data for 48 U.S. states for the year 1995 on the following variables:
Q = is the number of pack of cigarettes sold per capita in the state
P = Price is the average retail cigarette price per pack during the fiscal year
Inc = Per capita Income
Sales tax = is the portion of the tax on cigarettes arising from the general
sales tax measured in dollars per pack
Cig.-spec. tax = The cigarette specific tax is the tax applied to cigarettes
All prices, incomes, and taxes are deflated by Consumer price Index and
hence are in real dollars.
What do you think is the problem in the above model? (Are these estimates
unbiased?) Derive the expression for the bias for 1.