lbur boo, who has no training in statistics, wants you to estimate the coefficients in this...

Question

lbur boo, who has no training in statistics, wants you to estimate the coefficients in this stochastic model:
Income = + .31 * Years of Education + 3> * Sex + Income is measured in the thousands of dollars. Years of Education measures the number of years of schooling after High School ((where high school is the school you attend just before university)). Sex is an indicator variable that equals 0 if an individual is male, and 1 if an individual is female.
1. You use OLS to estimate coefficients for the model. Your estimate for Years of Education is bi = 7. Interpret this estimate for your boss. 2. Your estimate for the coefficient on Sex is 62 = —3. Interpret this estimate for ?•our boss.
1

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David · Accepted Answer

Answer: 
1. 
b1 = 7 implies that if number of years of education increases by one year, then 
income of a person on an average would increase by 7 thousand dollars.  
2. 
b3= -3 implies that the male on an average earns 3 thousand dollars more than 
female i.e. the average income of a female is 3 thousand dollar less than the 
average income of a male. 
3. 
The assumption needed to correctly identify b1 and b2 are the followings; 
1. The regression should be linear in parameter 
2. Mean of error term for a given value of explanatory variable should be zero 
3. No autocorrelation i.e. two error terms should not be correlated. 
4. Homoschedasticity i.e. error terms should be same variance. 
5. No specification error in the model 
6. Error term and explanatory variables are not correlated. 
These assumptions together are called assumptions of classical linear regression 
model. Given this assumption,

lbur boo, who has no training in statistics, wants you to estimate the coefficients in this stochastic model: Income = + .31 * Years of Education + 3> * Sex + Income is measured in the thousands of...

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