# Hypothesis tests in STATA

1. The file cocaine.dta contains 56 observations on variables related to

sales of cocaine powder in northeastern California over the period 1984-

1991. The variables are

price = price per gram in dollars for a cocaine sale

quant = number of grams of cocaine in a given sale

qual = quality of the cocaine expressed as percentage purity

trend = a time variable with 1984 =1 up to 1991 =8.

Consider the regression model

price = B1 + B2quant + B3qual + B4trend + e (1)

(a) What proportion of variation in cocaine price is explained by variation

in quantity, quality, and time?

(b) It is claimed that the greater the number of sales, the higher the

risk of getting caught; and thus, sellers are willing to accept a

lower price if they can make sales in larger quantities. Set up H0

and H1 that would be appropriate to test this hypothesis. Carry

out the hypothesis test.

(c) Test the hypothesis that the quality of cocaine has no influence

on price against the alternative that a premium is paid for better

quality cocaine.

(d) What is the average annual change in the cocaine price? Can you

suggest why price might be changing in this direction?

https://brainmass.com/economics/econometric-models/hypothesis-tests-in-stata-56759

#### Solution Preview

1. The file cocaine.dta contains 56 observations on variables related to sales of cocaine powder in northeastern California over the period 1984- 1991. The variables are

price = price per gram in dollars for a cocaine sale

quant = number of grams of cocaine in a given sale

qual = quality of the cocaine expressed as percentage purity

trend = a time variable with 1984 =1 up to 1991 =8.

Consider the regression model

price = B1 + B2quant + B3qual + B4trend + e (1)

(a) What proportion of variation in cocaine price is explained by variation in quantity, quality, and time?

use STATA commend: regress price quant qual trend

we get the following ...

#### Solution Summary

Hypothesis tests in STATA are examined.