Conservation efforts took place only during the last two

Question

Buiding A Model of the Demand for Water in Los Angeles

Instruction:

1. Your goal is to build a model of the demand for water in Los Angeles County as a function of population, rainfall and other variables.

2. Carefully take into consideration issues like specification bias, multicolinearity, autocorrelation, or heteroskadasticity in the modeling.

3. Give out estimation results of the final model you chose and your explanation of the model in Word file.

4. Send the file to me as attachment in email by Dec. 16th.

Data Description:

W - Consumption of water in Los Angeles county in year t (hundreds of millions of gallons)
POP - Population in Glendale, CA in year t (thousands of people)
T - Average annual temperature at the Los Angeles civic center in year t (degrees F)
R - Inches of rainfall at the Los Angeles civic center in year t.
P - average price of a gallon of water in Los Angeles in year t. (dollars)
CO - A dummy variable to measure the conservation efforts undertaken in the last two years in the sample, when there was a
severe drought in Northern California (the source of much of L.A.'s water) even though no such drought took place in
Southern California.
Y- Total personal income for LA county in year t (in billions of dollars)

Note:

1. Population data for LA county were unavailable for the entire sample when the data were collected, so population in Glendale
was used as a proxy.

2. Conservation efforts took place only during the last two years in the sample, so if conservation efforts have an effect but with a lag,
we'd be forced to use a "one-time dummy".

3. Thus there are reasons to be concerned that population and conservation are not accurately measured in the sample.

Year	W	POP	T	R	P	Y
1	53.385	108.7	63.6	26.21	0.23	9.5345
2	60.311	110.78	64.6	9.46	0.22	10.783
3	60.064	113.34	64.9	11.99	0.22	11.991
4	58.939	114.79	63.7	11.94	0.23	13.019
5	62.33	115.78	64.8	16	0.22	14.288
6	62.361	117.11	65.7	9.54	0.23	15.428
7	65.409	118.26	67.1	21.13	0.25	15.876
8	71.914	118.38	67.3	5.58	0.25	17.327
9	70.417	119.44	65.7	8.18	0.26	18.002
10	73.549	121.88	65.3	4.83	0.26	18.888
11	69.093	123.12	62.3	18.79	0.27	20.342
12	67.479	126.77	65.1	8.38	0.26	21.581
13	73.277	129.83	63.2	7.93	0.26	22.979
14	68.947	132.44	64.3	13.69	0.26	24.228
15	73.437	135.79	66	20.44	0.26	26.099
16	72.34	137.05	66.5	22	0.28	27.924
17	76.044	137.27	66.2	16.58	0.3	29.908
18	75.155	137.92	65.4	27.47	0.34	32.407
19	81.664	132.66	66.1	7.77	0.37	34.098
20	80.544	132.75	65.1	12.32	0.39	34.314
21	81.418	133.11	66.5	6.54	0.43	37.116
22	76.707	132.7	65	17.45	0.44	39.191
23	80.615	136.51	65.3	16.69	0.47	43.784
24	80.062	138.01	63	10.7	0.51	47.822
25	81.467	139.26	65.2	11.01	0.6	53.334
26	69.315	133.92	65.9	14.97	0.75	59.267