HypothesisTesting

# HypothesisTesting - Regression Analysis and Hypothesis...

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Regression Analysis and Hypothesis Testing Ch1 Appendix pp.16-19

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Hypothesis Testing • Most of the predictions of economic theory are in the form of: the effect one economic variable (independent) will have on another economic variable (dependent), all else equal. • These predictions are sometimes called comparative statics. • Example: – Economic theory predicts that if the price of oil increases, then the sales of hybrid vehicles will also increase. (Because they are substitutes.) • P O => Q HV *
More Labor Examples • A person with more education will earn higher wages than a person with less education, all else equal. • Years of Schooling => wages • A construction worker who works on the top of a skyscraper will earn higher wages than a construction worker who works on two story townhouses, all else equal. • Safety => wages

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Hypothesis Testing • All economic predictions of this form can be tested in generally the same way. • I will use the example from Ehrenberg and Smith appendix 1A to review hypothesis testing. • Prediction: A firm paying higher wages will have a lower voluntary labor turnover rate (or quit rate) than a firm paying lower wages. • wages => quit rate
Data • To test our hypothesis we need “firm level” data on wages and quit rates. • Hypothetical Data, 1993: 10 12 6 15 10 5 20 8 4 30 8 3 35 6 2 40% 4 1 Annual Quit Rate Average Hourly Wage Firm

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Data • Our data is considered cross-sectional data because it focuses on a particular point in time. • Data that follows a group of firms or individuals over time is called time-series data.
• A graph of the data shows that there is an apparent negative correlation between wages and quit rates. 2 4 6 8 10 12 average wage, W

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## HypothesisTesting - Regression Analysis and Hypothesis...

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