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Julie Melamud
PAM 310
Homework #2
February 27, 2008
1.
log(wage)= β
0
+ β
1
educ + β
2
exper + β
3
tenure
log(wage)= 0.284 + 0.0920educ + 0.0041exper + 0.0221tenure
b. Interpret estimated coefficients:
•
Estimated β
1
 If we increase education by one unit and hold the values of
experience and tenure fixed, then wage would increase by 9.2%
(0.092x100%).
•
Estimated β
2

If we increase experience by one unit, and the values of
education and tenure are held constant, then wage would increase by
0.41% (0.0041x100%).
•
Estimated β
3
 If we increase tenure by one unit, and hold the values of
education and experience fixed, then wage increases by 2.21%
(0.0221x100%).
c. The value of R
2
is 0.3160. This value implies that education, experience, and
tenure altogether can explain 31.6% of the variation in wages.
d. MLR 3 (No perfect collinearity) is the assumption that none of the independent
variables are constant and that there is no exact linear relationships among the
independent variables. This model DOES violate MLR 3 because if g(
exper
)= 2 x
exper
, then
g(exper)
is a constant multiple of
exper,
and there is an exact linear
relationship between the variables. Therefore, the model suffers from perfect
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 Spring '08
 ABDUS,S.

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