Your boss is about to start production of her newest box-office smash-to-be, Invasion of the Economists, Part II, when she calls you in and asks you to build a model of the gross receipts of all the movies produced in the last five years. Your regression is (standard errors in parentheses):9

where: Gi = the final gross receipts of the ith motion picture (in thousands of dollars) Ti = the number of screens (theaters) on which the ith film was shown in its first week Fi = a dummy variable equal to 1 if the star of the ith film is a female and 0 otherwise Ji = a dummy variable equal to 1 if the ith movie was released in June or July and 0 otherwise Si = a dummy variable equal to 1 if the star of the ith film is a superstar (like Tom Cruise or Milton) and 0 otherwise Bi = a dummy variable equal to 1 if at least one member of the supporting cast of the ith film is a superstar and 0 otherwise

a. Hypothesize signs for each of the slope coefficients in the equation. Which, if any, of the signs of the estimated coefficients are different from your expectations?

b. Milton, the star of the original Invasion of the Economists, is demanding \$4 million from your boss to appear in the sequel. If your estimates are trustworthy, should she say “yes” or hire Fred (a nobody) for \$500,000?

c. Your boss wants to keep costs low, and it would cost \$1.2 million to release the movie on an additional 200 screens. Assuming your estimates are trustworthy, should she spring for the extra screens?

d. The movie is scheduled for release in September, and it would cost \$1 million to speed up production enough to allow a July release without hurting quality. Assuming your estimates are trustworthy, is it worth the rush?

e. You’ve been assuming that your estimates are trustworthy. Do you have any evidence that this is not the case? Explain your answer. (Hint: Assume that the equation contains no specification errors.)

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