Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 10

In the linear consumption function

the (estimated) marginal propensity to consume (MPC) out of income is simply the slope, J3V while the average propensity to consume (APC) is cons/inc = (ijinc + fiv Using observations for 100 families on annual income and consumption (both measured in dollars), the following equation is obtained:

(i) Interpret the intercept in this equation, and comment on its sign and magnitude.

(ii) What is the predicted consumption when family income is $30,000?

(iii) With inc on the x-axis, draw a graph of the estimated MPC and APC.

Step 1 of 4

The estimated least square line is given by:

Here, is the estimate of slope. The dependent variabledepends on the independent variable. The most important part of the above regression line is the slope which depicts the change in predicted value ofdue to one unit change in predictor variable. Consider the provided regression equation to solve the subparts:

Here, consumption is the dependent variable and income is the independent variable.