A researcher is studying the returns to advertising in industry A and industry B. She collected data on n different firms in one month that operates in either industry A or B. The following data was collected: salei is the total sales in dollars of firm i in that month, adi is the advertising expenditure of firm i in dollars, Ai is a dummy equal to 1 if the firm is in industry A and 0 otherwise, and adAi is the interaction between adi and Ai.
salesi = 15, 000 + 0.3adi + 5000Ai ? 0.1adAi
a) According to regression 3 which of the two industries has the highest return to advertising? What is the difference in returns to advertising between the two industries? Explain.
b) Using the estimates in 3 would a firm in industry A or industry B have higher predicted sales given that $1,000 is spent on advertising? Explain
c) Do you believe that this regression measures the causal effect of advertising on sales or do you suspect that the estimate will be biased? Explain.