In, we wrote the model that explicitly contains the long-run propensity, β0, aswhere we om...

In, we wrote the model that explicitly contains the long-run propensity, β0, as

where we omit the other explanatory variables for simplicity. As always with multiple regression analysis, β0 should have a ceteris paribus interpretation. Namely, if pet increases by one (dollar) holding (pet-1 - pet) and (pet-2 - pet) fixed, gfrt should change by β0.

(i) If (pet-1 - pet) and (pet-2 - pet) are held fixed but pet is increasing, what must be true about changes in pet-1 and pet-2?

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