Unit 7 ECON16 (assignment answer key)

# E401khat 1 138 203 for the families not eligible for

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e401khat = 1 138 203 For the families not eligible for a 401(K), what percentage of these are predicted by your model to not be eligible? For the families eligible for a 401(K), what percentage of these are predicted by your model to be eligible? What is the overall percent of observations correctly predicted by your model? For families that are not eligible, the model predicts 574/712*100 = 80.62% correct; for those families that are eligible, the model predicts 237/440*100 = 53.86% correctly. Overall, the model predicts (574 + 203)/(712 + 440). Overall the model is correct 67.45% of the time. (iii) Discuss why your work, and answers in (ii) above might be considered a better measure for the “goodness of fit” for this model rather than the traditional measure of R 2 . 8

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The R 2 for this model is actually quite low: 0.1291, and suggest not a very strong explanatory power for the “variation inY.” But with LPM models, more interesting that explaining the “variation in Y directly” is the notion of probability that Y will be 0 or 1. In this case, a more direct measure, then, of the model’s ability to predict the true value of Y would seem to be given by the analysis above. The fact that the model “predicts” the correct value for Y more than 67% of the time actually suggest the model performs pretty well, an impression that may not be had if one looked only at R 2 . 9
Software Output: #1. female 25 1 0 1 1 nonwhite 25 1 0 1 1 exper 25 16.84 11.08933 2 38 educ 25 12.28 2.47521 6 16 wage 25 4.2376 1.907481 1.96 10 Variable Obs Mean Std. Dev. Min Max -> nonwhite = 1, female = 1 female 29 0 0 0 0 nonwhite 29 1 0 1 1 exper 29 18.24138 15.57621 1 51 educ 29 11.51724 3.915361 3 18 wage 29 6.543448 3.630215 2.38 15 Variable Obs Mean Std. Dev. Min Max -> nonwhite = 1, female = 0 female 227 1 0 1 1 nonwhite 227 0 0 0 0 exper 227 16.38326 13.92611 1 50 educ 227 12.32159 2.477799 0 18 wage 227 4.626211 2.589199 .53 21.63 Variable Obs Mean Std. Dev. Min Max -> nonwhite = 0, female = 1 female 245 0 0 0 0 nonwhite 245 0 0 0 0 exper 245 17.47755 13.26667 1 49 educ 245 12.93878 2.848699 2 18 wage 245 7.165306 4.221021 1.5 24.98 Variable Obs Mean Std. Dev. Min Max -> nonwhite = 0, female = 0

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