Econ107HW2. (1)

# Econ107HW2. (1) - VeronicaColis 860994597 Econ107 Homework2...

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Veronica Colis 860994597 Econ 107 Homework 2 Chapter 2: 1, 5, C1, C3, C5, C7 1. Let kids denote the number of children ever born to a woman, and let educ denote years of education for the woman. A simple model relating fertility to years of education is , ids k = β educ 0 + β 1 + u where u is the unobserved error. (i) What kinds of factors are contained in u? Are these likely to be correlated with level of education? The factors contained in u are: income, age, family background, etc. Each of these could be correlated with education like income and education positive correlate. (ii) Will a simple regression analysis uncover the ceteris paribus effect of education on fertility? Explain. No, factors in (i) could be correlated with education ( u / educ ) = E / 0 5. In the linear consumption function inc , cons ︿ = β 0 ︿ + β 1 ︿ the (estimated) marginal propensity to consume (MPC) out of income is simply the slope, , β 1 ︿ while the average propensity to consume (APC) is . Using observations / inc / inc cons ︿ = β 0 ︿ + β 1 ︿ for 100 families on annual income and consumption (both measured in dollars), the following equation is obtained: 24.84 .853 inc cons ︿ = − 1 + 0 00, R .692. n = 1 2 = 0 (i) Interpret the intercept in this equation, and comment on its sign and magnitude. ­ The intercept implies that when inc=0, cons is predicted to be ­124.84, This consumption function might be a poor predictor of consumption at very low­income levels.

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