1. In Example 10.4, we wrote the model that explicitly contains the long-run propensity, u0, as gfrt 5 a0 1 u0 pet 1 d1 1 pet 21 2 pet 2 1 d2 1 pet 22 2 pet 2 1 u , where we omit the other explanatory...

1. In Example 10.4, we wrote the model that explicitly contains the long-run propensity, u0, as

gfrt
5 a0 1 u0pet
1 d1 1pet21 2
pet
2 1 d2 1pet22 2
pet
2 1
u,

where we omit the other explanatory variables for simplicity. As always with multiple regression analysis, u0 should have a ceteris paribus interpretation. Namely, if
pet
increases by one (dollar) holding 1pet21 2
pet
2 and 1pet22 2
pet
2 fixed,
gfrt
should change by u0.

(i) If 1pet21 2
pet
2 and 1pet22 2
pet
2 are held fixed but
pet
is increasing, what must be true about

changes in
pet21 and
pet22?

(ii) How does your answer in part (i) help you to interpret u0 in the above equation as the LRP?