Assignment 1 EC2406
Exercise 4.3 a, c-f
a) 710.7 is the intercept and 8.8 is the slope. 8.8 shows the marginal effect of average
monthly income (AMI) on average monthly expenditures (AME). AME is expected to
increase by 8.8 for every unit increase in AMI.
b) —
c) R2=0,03. This indicates that the regressor is not very good at predicting Y. R2is a
fraction between 0 and 1 and has no units. R2→ is unit free
d) AME = 710.7 + 8.8 * AMI
Person with income €100: AME=710.7+8.8*100 = € 1590.7. A person with income
100 will have an AME of 1590.7.
Person with income €200: AME=710.7+8.8*200= €2470.7. person with income 200
will have an AME of 2470.7
e) No it would not since the sample goes from 100 to 1.5 million. 2 million is outside
our range for sample data.
f) Distribution of earrings is usually highly skewed. We have statistical models for
income distribution. In regression analysis usually the distribution of independent
variable is not considered. Normality of errors is only needed for testing of hypothesis
for regression coefficient and coefficient interval construction. So we can se that error
term has a normal distribution.
