Question: Exercise 3: The following equation (model 1) is estimated using data for 32 firms in the chemical industry:

where rdintens denotes expenditures on research development (ROD) as a percentage of sales. Sales are measured in millions of dollars.

(i) Comment on the following statement: The model allows sales to have a constant effect on rdintens.

(ii) At what point does the marginal effect of sales on rdintens become negative? Using the same data as the model 1, the following equation (model 2) is estimated:

where profmrg is profits as a percentage of sales.

(iii) Interpret the coefficient on log(sales). In particular, if sales increases by 10%, what is the estimated percentage point change in rdintens? Is this an economically large effect?