4

As newly appointed "Energy Czar," your goal is to reduce the total demand for residential heating fuel in your state. You must choose

one of three legislative proposals designed to accomplish this goal:

(a) a tax that would effectively increase the price of residential heating fuel by $1;

10

points

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(b) a subsidy that would effectively reduce the price of natural gas by $3; or

(c) a tax that would effectively increase the price of electricity (produced by hydroelectric facilities) by $4.

To assist you in your decision, an economist in your office has estimated the demand for residential heating fuel using a linear demand

specification. The regression results are presented below.

SUMMARY OUTPUT

Regression Statistics

Multiple R

R Square.

Adjusted R Square

Standard Error

Observations

Analysis of Variance

Regression

Residual

Total

0.76

0.57

0.49

47.13

25

Degrees of

Freedom

4

20

24

Coefficients

136.96

Sum of Squares

60936.56

44431.27

105367.84

-91.69

43.88

-11.92

-0.050

Standard Error

Intercept

Price of Residential

Heating Fuel

Price of Natural Gas

Price of Electricity

Income

Based on this information, which proposal would you favor?

43.46

29.09

9.17

8.35

0.3500

Mean Square

15234.14

2221.56

t Stat

3.15

-3.15

4.79

-1.43

-0.14

F

6.86

P-value

0.01

A tax that would effectively increase the price of residential heating fuel by $1.

A subsidy that would effectively reduce the price of natural gas by $3.

O A tax that would effectively increase the price of electricity by $4.

0.01

0.00

0.17

0.90

Significance

F

0.03

Lower 95%

50.60

-149.49

25.66

-28.51

-0.75

Upper 95%

223.32

-33.89

62.10

4.67

0.65