Answer both questionsQuestion 1You have the following question of interest: How does an increase in...

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Answer both questionsQuestion 1You have the following question of interest: How does an increase in your neighbor's income affect your consumption? To provide a model to answer this question, you isolate the following random variables of interest: Ct - consumption for household i - lottery winnings for household i Ni - lottery winnings for neighbors of household i Ui - other determinants of consumption household iYou propose the following stochastic model C, = a + (i'W,+ yNi +a) Interpret the coefficient R.

David · Accepted Answer

Answer to 1:
a. 
The coefficient ‘β’ says that if household ‘i' wins a lottery, then on an average his 
consumption would increase by ‘β’. 
b. 
The parameter ‘?’ would provide the information regarding the question of interest. The 
value taken by ‘?’ should be greater than zero if indeed, increase neighbor’s income lead 
to increase in the consumption of household ‘i'.  
c. 
Ci* = ?Ni*+Ui* 
? is identified here and it would be equal to = ∑       
 
 /∑  
 
 
  
Assumption required for identification: the explanatory variable should either be non-
stochastic (i.e.

Answer both questions Question 1 You have the following question of interest: How does an increase in your neighbor's income affect your consumption? To provide a model to answer this question, you...

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