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    RSS, OLS Residuals

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    From a cross-section sample on average costs (C) and output (O) for 30 firms (10 small, 10 medium and 10 large) the following OLS estimates were obtained...

    a) How do I Interpret the estimated equations and use an F Test to test the hypothesis that there is no difference in the cost functions for small, medium and large firms. What assumptions does this test require? Is there any evidence given above that these assumptions are violated and how would I explain this?

    (b) How can I plot the estimated functions for small, medium and large firms with Output varying between 0 and 25. What conclusions can I draw from this?

    (c) Would it make sense to estimate the model connecting average costs and output for all firms by including dummy variables? Explain.

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    Solution Summary

    OLS estimates are obtained.