Chapter 2, Exercise Solutions, Principles of Econometrics, 3e30Exercise 2.15 (continued) (b) The estimated equation is n4.912 1.139WAGEEDUC=−+The coefficient 1.139 represents the associated increase in the hourly wage rate for an extra year of education. The coefficient −4.912 represents the estimated wage rate of a worker with no years of education. It should not be considered meaningful as it is not possible to have a negative hourly wage rate. Also, as shown in the histogram, there are no data points at or close to the region EDUC= 0. (c) The residuals are plotted against education in Figure xr2.15(c). There is a pattern evident; as EDUCincreases, the magnitude of the residuals also increases. If the assumptions SR1-SR5 hold, there should not be any patterns evident in the least squares residuals.
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