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Model specification sandbox

One model, many specifications. See how functional form, a squared term, and a dummy variable each change what a coefficient means and how the fitted line bends. The same seeded data sit under all three views.

Estimated slope β̂β̂ = 0.630
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intercept β̂₀ 1.647slope β̂₁ 0.630
Functional form
ln(y) = β₀ + β₁·ln(x)
slope β̂₁ = 0.630
Elasticity. Both sides logged, so β̂₁ = 0.630 is the % change in y per % change in x, directly and unit-free. A 1% rise in x moves y by about 0.63%.
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Discussion. The fitted curve barely moves, yet the slope's units change with every form. When would you report an elasticity rather than a dollar effect, and why is 100·β̂ only an approximation to the exact 100·(e^β̂ − 1)?

OLS is re-fit by least squares in the chosen form's transformed space, then mapped back to the raw axes. For log–level, a one-unit rise in x gives %Δy = 100·(e^β̂ − 1) exactly, with 100·β̂ as the first-order approximation. For log–log, β̂ is the elasticity directly (the % change in y per % change in x), exact at the margin.

Functional Form: Logs and ElasticitiesOpen in Dr Phil's Quant Lab ↗