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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 Spring '14
 Work, prate

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